What is Spread?
The term “spread” in trading refers to the gap or difference between the bid and ask prices of a financial instrument or asset. The bid price is the highest price that a buyer is willing to pay for the asset, while the ask price is the lowest price that a seller is willing to accept for the same asset. Therefore, the spread represents the cost that traders pay to buy or sell an asset, and it can be used to determine the liquidity, volume, and volatility of the market.
The spread can vary depending on the liquidity of the market, the volume of trades, and the volatility of the asset. Generally, highly liquid assets with high trading volumes tend to have narrower spreads, while illiquid assets with low trading volumes tend to have wider spreads.
- Spread is the difference between the bid and ask prices of a financial instrument or asset.
- It represents the cost of trading that asset and is paid by traders who want to buy or sell the asset.
- The spread can vary depending on the liquidity, volume, and volatility of the market.
- Narrow spreads are generally considered better for traders, as they reduce the cost of trading and can lead to more profitable trades. Conversely, wider spreads can make trading more expensive and less attractive for traders.
Example of Spread
You want to buy shares of a company, and you see that the current bid price is $50 per share, while the ask price is $51 per share. In this case, the spread is $1 per share ($51 – $50).
If you decide to buy 100 shares of this company, you would have to pay the ask price of $51 per share, which would cost you $5,100 ($51 x 100). However, if you decided to sell those same shares immediately, you would only receive the bid price of $50 per share, which would give you $5,000 ($50 x 100). This means that you would incur a loss of $100 due to the spread.
In this example, the spread is relatively narrow, which could be an indication that the market for this company's shares is relatively liquid, and that there is a high volume of buyers and sellers. If the spread were wider, say $2 or $3 per share, it could suggest that the market for this company's shares is less liquid, and that there are fewer buyers and sellers.
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