What is a spread?

It’s a word you’ll hear banded about a lot, but what is a spread? And what how does it affect your profitability?

On any spread betting platform, you’ll see two prices offered for any instrument – one is the ‘bid’ price; the other is the ‘ask’ price. The difference between these two prices is ‘the spread’.

The spread is like the ‘cut’ that your broker makes on every transaction – bit like when you buy or sell foreign currency, and pay a premium at the exchange bureau.

The spread your broker charges is determined by a number of factors, such as liquidity, supply, demand and total trading activity. Brokers sometimes offer fixed spreads on some markets, but you’ll notice that spreads on stocks can shift significantly over short period of time – it’s important to keep an eye on these costs.

When you put your trade on, the cost of the spread is applied, which means you’ll often see an immediate loss showing for that trade – this will need to be paid for before your trade moves into profit. So, you’ll see why the larger the spread, the harder it is to make a winning trade.

For example, let’s say you want to buy the FTSE because you believe its price will rise by 20 points. Your spread betting broker is offering a price of 7518 to buy, and 7517 to sell. This means that the spread on the FTSE is 1 point. So, if you buy the FTSE at 7518, the actual price of that instrument will be 7517.5, so you’ll be starting out with a loss of 0.5 points.

These may seem like tiny figures that won’t affect your trading, but just a small difference in spread costs can make a significant difference in profitability – in fact, an expensive spread can easily turn a winning strategy into a losing one. So a canny investor will seek out the cheapest trading costs.

If you’d like to read more about which brokers are currently offering good value, please check out this post.

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How Spread Betting Works Low trading costs: how this one thing can save money AND boost your success rate