What Is a Spread?

What Is a Spread?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

In financial terms, a spread is the difference between two prices, rates or yields. In simplest terms, it’s the gap or distance between two things. For instance, in stock trading, spread referred to as the gap between the bid price (i.e., the highest amount a buyer is willing to pay for an asset) and the ask price (i.e., the lowest price a seller is willing to accept). Spread is used in several contexts, like currency exchange rates, commodities, and bonds. It’s a key aspect of trading and investing, as it essentially determines the profitability of a transaction.

Related Questions

1. What is a Bid-Ask Spread?

In trading, a Bid-Ask Spread is the difference between the price a buyer is willing to pay for an asset (the bid) and the price a seller wants for that same asset(the ask). It’s a major indicator of the liquidity of an asset, with smaller spreads usually associated with high liquidity.

2. What is a Yield Spread?

Want More Financial Tips?

Get Our Best Stuff First (for FREE)
We respect your privacy and you can unsubscribe anytime.

Yield Spread, or credit spread, is the difference in yield between two bonds that have the same maturity but different credit quality. This spread compensates investors for the extra risk taken on a bond with a lower credit rating.

3. What is a Commodity Spread?

A commodity spread involves the simultaneous purchase and sale of two different but related commodities. This is usually done to take advantage of a perceived disproportion in the price spread.

4. What does Spread mean in Forex trading?

In Forex trading, the spread is the difference between the buy (ask) and sell (bid) prices of a currency pair. It’s essentially the cost of trading that currency pair, and lower spreads generally mean lower trading costs.

5. How does Spread impact investors?

Spread directly impacts the profitability of an investment. A wider spread indicates a higher potential cost to the investor, while a narrower spread suggests lower potential costs. Therefore, investors commonly seek assets with narrower spreads to minimize costs.