What is Spread?
In the financial market, spread simply means a difference between the two prices. When you’re trading, you will notice two prices: Ask price and bid price. The gap between these two price points is called a spread. In the financial landscape, spread simply means a difference between the two prices.
Ask and Bid Price
If you’re new in trading, you may have heard of bid and ask in Forex.
The bid price is a price that an investor or trader is ready to pay for a security. On the other hand, the ask price is the price that an investor or trader is ready to sell the security for. In short, when you’re doing ask vs bid comparison, these are two price points an asset is bought or sold at in a given time. So, the difference between ask price and bid price is called a spread.
How Does Spread in Trading Works?
When you’re trading in forex, two currencies are involved. Let’s say AUD/USD, wherein 1 AUD equals 0.76 USD. Now, if you anticipate AUD will rise, you will buy the AUD/USD pair. But here, you won’t precisely pay 0.76 USD for 1 AUD. The price will be slightly higher, perhaps 0.79 USD, which would be the asking price. Similarly, the seller won’t exactly get 0.76 USD but slightly less, perhaps 0.73, which would be the bidding price.
The difference between ask price and bid price is the spread of this currency pair, in the given time, at the particular broker. In the present example, the spread is 0.06 points.
Several factors affect the spread, including the price of the asset, market liquidity, and volatility. For instance, when the market is highly volatile and the price changes much more rapidly, the spread would be wider. Similarly, assets that aren’t traded commonly, which means they aren’t as liquid comparatively, they would have a wider spread.
How to Calculate Spread?
Calculating the bid ask spread is simple. And, as mentioned, the live spread is one of the key concepts a trader must keep in mind when making any transactional decision.
Say the ask price of a security is $9943.87; this is the price point a trader is willing to sell the security at. And the bid price is $9942.87; this is the price point a trader is willing to pay to buy the security. The gap between these two price points is 1.0. This is the spread and this is how you calculate bid ask spread.
What Does Wide Spread Means?
Now you know what is spread and ask vs bid difference, comes now the next most important question: When the spread is wide, what does it mean? Or, why should the traders care about it?
If there’s a bigger gap between the bid and ask prices, it signals the market is highly volatile and has low liquidity. Contrarily, when the spread is low, it indicates low volatility and high liquidity. Such indicators can help traders make better and timely trading decisions, enabling them with opportunities to unlock better returns.
