What is Spread?
The difference between what you are willing to pay and what the seller wants to get.
Imagine you're at a farmers' market, looking to buy a fresh apple. One vendor is selling apples for $1 each, but another buyer standing nearby is only willing to pay $0.90 for an apple. That $0.10 difference between what the seller wants and what the buyer is willing to pay is known as the "spread."
In the trading world, the spread is the difference between the bid price (what buyers are willing to pay) and the ask price (what sellers want to receive) for a stock, option, forex pair, or any tradable asset. The tighter (smaller) the spread, the more liquid and actively traded the market is. A wider spread usually means lower liquidity or higher volatility.
Why Does the Spread Matter?
Transaction Costs – Even if you don’t see a direct fee, the spread is a cost. If you buy at the ask price and immediately sell at the bid price, you take a loss equal to the spread.
Liquidity Indicator – A small spread suggests a market with lots of buyers and sellers, making it easier to get in and out of trades.
Market Conditions – Wider spreads can occur during volatile times or in markets with lower trading volume.
Example of Spread in Action
Let’s say you’re looking at a stock with a bid price of $49.90 and an ask price of $50.10. The spread is $0.20. If you buy at $50.10 and immediately try to sell, you’d only get $49.90 - meaning you'd start with a $0.20 loss per share due to the spread.
How to Minimize Spread Costs
Trade in high-volume markets where spreads are naturally lower.
Use limit orders to control your entry and exit points.
Avoid trading during low-liquidity times (like after hours or pre-market sessions).
Wrapping Up
The spread is like the gap between what a seller wants and what a buyer is willing to pay. It's a normal part of trading, but understanding it can help you make better decisions and reduce unnecessary costs. Keep an eye on the spread… it’s a hidden but important factor in every trade.