All you sports gambling aficionados out there know all about "the spread" but perhaps some of you casual investors need to catch up. Thankfully, that's exactly what today's topic is all about. Spread trading is a simple concept to grasp and an essential one to use if trading in various financial markets. So let's crack open the notebooks and find out how this technique can have a major impact on your profitability.
First off, let's define what spread trading really is. When you examine a financial market, you'll see three different prices. There is the market price, the buy price, and the selling price. The difference between the buy and sell price is what we call the spread. So why is this so important? Well, a tighter spread usually means lower trading costs. This is because a tight spread signifies that the market price will not have to move so far from your entry price for your trade to become a profitable one.
Let's use an example for this one. Say you are trading assets like forex, shares or commodities. Who dictates the spread? Well, what's so beautiful about spread trading is the participants in the market decide it all. If you are trading at the market price, then the offer is the lowest price at which one can buy. Furthermore, the bid is the highest prices at which you can sell.
However, if you are trading derivatives like a CFD, then your provider will add their own spread on top of the market price. This spread signifies the fee you are paying to trade that given derivated.
Besides pricing, there are a large number of factors that influence the size of a spread. For example, the more people who are buying and selling in a particular market, then the tighter the spread is. If there are fewer participants, then the spread widens. Furthermore, volatility caused by big news or announcements leads to market movements. You see things like this all the time in the world of crypto. Just a single announcement from someone like Ethereum can send the market into a tailspin. That's why it's so crucial to use tools like BestRate to always find the best exchange rates in a volatile market.