What's A Spread & Bid-Offer Spread?

[Ronald Ray]

In trading, a spread is a difference between the prices to buy (offer) and sell (bid) an asset. The spread is an important part of trading CFDs because it is how the prices of both derivatives are set.

Spreads are a common way for brokers, market makers, and other providers to show their prices. 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 lower. Spread can mean different things in the financial world, but it always means the difference between two prices or rates. 

For instance, it is also a trading strategy called an option spread. Buying and selling the same number of options with different strike prices and expiration dates is how this is done.

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Bid-Offer Spread
The bid-offer spread, which is also called the bid-ask spread, is just another name for the spread added to the price of an asset. The bid-offer spread shows how much people want and are willing to pay for an asset.

If the bid price and the offer price are close to each other, the market is said to be tight, which means that buyers and sellers agree on how much the asset is worth.
 

If the spread is larger, it means that people have very different ideas. There are many things that can affect the bid-ask spread, such as:

1. Liquidity: This means how easy it is to buy or sell something. As an asset gets more liquid, the bid-ask spread tends to get smaller.

2. Volume:  This is a way to report how much of an asset is traded every day. Assets that are traded more often tend to have smaller bid-offer spreads.

3. Volatility:  This is a way to measure how much the market price changes over time. When prices change quickly, which is called high volatility, the spread is usually much bigger.
 

It turned out that many new traders don't pay any attention to spreads at all. In this post, we'll talk about what the market spread is and how it can sometimes ruin a trade that seems good at first.

No matter what kind of financial instrument we trade, if we want to buy an asset, we have to find someone who is willing to sell it to us. If we want to sell an asset, we have to find someone who wants to buy it.
The market makes it easy for people to buy and sell things. The price of an asset is based on the current supply and demand. But even the most liquid markets have two prices: the ask price and the bid price.

The ask price is the lowest price that market participants are willing to sell the asset to you, and bid price is the highest price that market participants are willing to buy the asset from you.
 

Almost never are the bid and ask prices the same. Their difference is called their spread. The size of the spread depends on how busy the market is.

Higher liquidity means more people are trading, and more people are trading, which makes it easier for people to make an exchange. On these markets, the spreads are lower.
 

On the other hand, markets with low trading volumes are called "less liquid." This makes it harder for market participants to find a trade partner.

Most of the time, spreads are high in such a market. Spreads must always be taken into account when figuring out the risk-to-reward ratio of a trade.

For scalpers and day traders, a spread that is higher than usual can ruin a trade that seems good at first. Always look at the spreads before you start trading.
Thanks for Reading!