Economics

What Is Spread?

Stalina
1 mn

Used across all markets, the spread is the difference between the buy (offer) and sell (bid) prices of an asset. Spreads provide an additional opportunity to traders to make money through buying and selling assets.

The spread of an asset will depend on the current demand or an asset and the market’s volatility and is presented in either a percentage or value form. Assets with markets displaying higher levels of demand will typically have smaller spreads and usually higher price points. 

As an example, when you look at an order book for Bitcoin you will usually see prices reflected in green and red reflecting the offer prices and bid prices. The spread will then be indicated above the most recent trades. As another example, consider foreign exchange counters where the buy and sell prices are different, this difference is known as the spread. Market makers use spreads to generate money from transactions completed at market prices. Let's put this in context: George buys 100 shares for a £2 ask price in “ABC” a publicly listed company. George pays £200 in return for 100 shares. If he decides to sell the shares back at the same price he bought them for, he would sell the 100 shares for the bid price at £1.95 and would receive £1.95 each instead of £2. This would mean he gets a return of £195 and loses £5, which would be paid to the market maker.