In online trading, whether it is spread betting or CFD (contracts for difference) trading, the spread is the difference between the purchase and sale price of an asset. The price at which you buy (the demand price) is always higher than the price at which you sell (the supply price), and the base market price is usually in the middle between these two prices.
Trading spreads are set by market makers, brokers and other suppliers to increase the value of trading opportunities depending on supply and demand. Depending on how expensive, volatile and liquid an asset is, the spread will fluctuate along with the asset price and trading volume.
What is a spread?
When you make a deal, you either buy or sell the specific instrument you are trading, depending on how you think the underlying market price will rise or fall. Derivative products such as spread bets and CFDs are used for this purpose.
Spread is one of the main items of expenses related to betting on the difference. As a rule, the smaller the spread, the more favorable conditions you get as a trader. We offer consistently competitive spreads starting from just 0.7 points for the EUR/USD and USD/JPY currency pairs and from 1.0 points for the FTSE 100 and DAX 30 indices. For more information about our spreads, see the “Markets” page.
How does spread in trading work?
Spread is the most important information that you need to know when analyzing trading costs. The spread of the instrument is a variable that directly affects the value of the transaction.
Spreads are based on the current or market price of an asset. Market makers and brokers can add some transaction costs to the spread to simplify the transaction process, which is especially typical for forward and futures contracts.
The size of the spread in trading is influenced by a number of the following factors:
- Liquidity. Liquidity is determined by the trading volume. A liquid asset can be easily converted into cash, while it is more difficult to do this with an illiquid asset. Less frequently traded assets tend to have a wider spread, while popular assets tend to have a narrower spread.
- Volatility. When there are strong and rapid price fluctuations in the markets, the spread is usually much wider. Market makers can use volatility as an opportunity to increase spreads, and traders try to profit from fluctuations.
- Price. It is related to both liquidity and volatility. When the asset price is low, volatility is much higher and liquidity is much lower, resulting in a wider spread. The reverse situation is observed when an asset is more expensive.
Spread trading platform
Trade with our competitive spreads on various financial markets, including forex, commodities, stocks, indices, cryptocurrencies and Treasury bonds. Our Next Generation spread trading platform has extensive charting capabilities, including price forecasting tools, several types of charts and order types, as well as automatic calculations for trading spreads. Register below to explore the platform.
Spread Trading Risks
Although a neutral market strategy with zero net risk sounds attractive, spread trading is not bulletproof – it can be risky.
First, an investor needs to know how to identify two highly correlated pairs of securities. This means that you need to know how to use and read a computer model and algorithm to find your mate. Secondly, the timing is very important. Your pair needs to be liquid (how fast you can buy and sell a security) so that you can act when the price gap disappears. Finally, there is no guarantee that prices will converge again, or it may take a long time before the cost will correlate again.
All investments involve risk. No one can predict the movement of stocks or the market. Always consider the investment goals.
FAQ
What is a bid-ask spread?
Bid-ask spread is the difference between the purchase price and the sale price of a financial instrument. Real-time purchase and sale prices are displayed on our platform and change depending on a number of factors, including market sentiment and liquidity on it. Read more about the purchase and sale prices here.
What does the wide spread indicate?
A wide spread means that there is a big difference between the supply and demand price of the instrument. This may indicate that the market is more volatile than usual, or low liquidity. A wide spread is usually accompanied by a higher level of risk, so you should read our risk management guide before opening a position.
Is it better to trade with a narrow or wide spread?
As a rule, a narrower spread is considered less risky for trading. For example, forex traders often look for major currency pairs with a narrower spread of about 0.7 or 0.9 points, as this usually means lower market volatility and higher liquidity. More detailed information can be found on the “Markets” page.
What is the spread value?
The spread value represents the transaction value of the instrument. Instead of charging a separate trading commission for placing an order, the cost of the spread is included in the purchase and sale price.
How to calculate the spread in trading?
To calculate the spread of a financial instrument, it is necessary to subtract the purchase price (bid) from the sale price (ask). When opening a position, there is no need to calculate the spread manually, our platform does it automatically. You can get acquainted with the current spreads for the most popular instruments on the “Markets” page.
