Every week we provide insights into popular assets and hot questions, so you can easily learn more about the investment market in bite-sized pieces.
In this Markets in Focus we take a closer look at Spread.
What is a Spread
In finance, the term "spread" can have various meanings, but it always refers to the difference between two prices. Specifically, in trading, the spread is the difference between the bid price (the price at which you can sell) and the ask price (the price at which you can buy).
Understanding Spread in Trading
When you trade an asset, you either buy or sell depending on whether you expect the market price to rise or fall. This is often done using derivative products like CFDs. The spread is one of the key costs involved in CFD trading; generally, the narrower the spread, the better the value for the trader.
Bid-Ask Spread
The spread in trading is calculated as the difference between the bid and ask price of a financial asset, whether it’s a currency pair, index, or commodity. This difference is known as the bid-ask spread. While our online trading platform automatically calculates this for you, understanding the origin of spread costs is beneficial.
The spread of an instrument reflects how closely aligned supply and demand are. A narrow bid-ask spread indicates a common consensus on the asset’s price, while a wider spread suggests a disparity in buyer and seller opinions on the asset’s value.
How Does Spread Work in Trading
The spread is a critical factor in analyzing trading costs, as it directly impacts the value of a trade. Spreads are centered around the current or market price of an asset.
Several factors influence the spread in trading:
Liquidity
- Liquidity is determined by the volume of trades. A liquid asset can be easily converted to cash, while an illiquid asset cannot. Assets that are less frequently traded usually have a wider spread, whereas commonly traded assets tend to have a narrower spread.
Volatility
- When markets experience large and rapid price movements, the spread typically widens. Market makers may increase their spreads during periods of high volatility, and traders often seek to profit from these fluctuations.
Price
- Closely related to liquidity and volatility, an asset with a lower price tends to exhibit higher volatility and lower liquidity, leading to a wider spread. Conversely, more expensive assets generally have narrower spreads.
We wish you a successful trading day on the Change App.
Until next week!
