Spread - Stock Trader Glossary

Spread refers to the difference between the bid price and the ask price of an asset, such as stocks, bonds, commodities, or currencies. The bid price is the highest price a buyer is willing to pay for the asset, while the ask price is the lowest price a seller is willing to accept for the asset. The spread is calculated by subtracting the bid price from the ask price.

Spreads are an important aspect of trading in financial markets, as they represent the transaction costs associated with buying or selling an asset. When an investor buys an asset, they must pay the ask price, and when they sell an asset, they receive the bid price, resulting in a loss equal to the spread. For example, if the bid price of a stock is $10 and the ask price is $10.10, the spread is $0.10, and the investor will have to pay this amount as a transaction cost.

The size of the spread can vary depending on several factors, such as the liquidity of the market, the volatility of the asset, and the supply and demand for the asset. Assets that are highly liquid, such as major currencies and large-cap stocks, typically have narrow spreads, while assets that are less liquid, such as small-cap stocks and exotic currencies, typically have wider spreads.

Spreads can also vary depending on the trading platform and the broker used. Some brokers offer fixed spreads, where the spread remains constant regardless of market conditions, while others offer variable spreads, where the spread can widen or narrow depending on market conditions. In addition, some brokers offer commission-based pricing, where the spread is zero, and the broker charges a commission on each transaction.

Overall, spreads are an important consideration for traders and investors when buying or selling assets in financial markets, as they represent the transaction costs associated with trading. It is important for traders and investors to understand the factors that affect spreads and to choose a trading platform and broker that offer competitive spreads and transparent pricing.