What is Spread ?
A spread in trading is the difference between the buy (offer) and sell (bid) prices quoted for an asset. The spread is a key part of CFD trading, as it is how both derivatives are priced.
Many brokers, market makers and other providers will quote their prices in the form of a spread. This means that the price to buy an asset will always be slightly higher than the underlying market, while the price to sell will always be slightly below it.
Spread can have a variety of other meanings in finance but they all refer to the difference between two prices or rates. For example, it is also a strategy in options trading,* known as an option spread. This involves buying and selling an equal number of options with different strike prices and expiration dates.
How do you calculate the Spread?
The spread itself is measured in 'pips' which is the smallest unit of price movement of a currency pair. So, the spread in the below example is 2 pips.
Spread = 12614 -12612 = 2 pips
Why are so important Low Spreads ?
As a trader, it may be crucial to use low spreads when executing a profitable strategy. Some traders have encountered the frustrating situation of their stop loss being triggered by a tiny price movement, only to see the market quickly reverse in their favor. This can be a significant setback for a trader. However, by using tighter spreads or factoring in trade costs through commission, traders can often hold onto a trade for a bit longer, even by half a pip, which can make the difference between a profitable or unprofitable trade.