When you’re trading on financial markets, it’s a word you’ll hear a lot. Financial providers talk about it in their advertising, and it could have a significant.impact on the profitability of your trades.
But what exactly is the spread?
a lot of markets have a ” buy ” price – and a ” sell ” price. The spread is the difference between the two. If the spread is tighter so it cost lower of trading – everything else being equal. That’s because the market price doesn’t have to move far to clear the spread. Of course, a wider spread makes it more difficult to profit.
So who sets the spread?
When you’re trading assets like shares, forex or commodities, the spread is determined by other participants in the market. The ‘offer’ is the lowest price you can buy, and the ‘bid’ is the highest price at which you can sell. If you’re trading at the market when trading derivatives like spread betting or CFDs. Your provider will often put their own spread on top of the underlying price. This represents the ‘fee’ for dealing in that market.
What could influence the size of the spread?
Other than pricing, there are factors could influence the size of the spread. Like Liquidity Volatility and Time of day.
In general, the more buyers and sellers in the market, the stricter the spread. But if there are fewer market participants, spreads tend to widen.
For example, before major economic announcements or news releases. These events can cause big price movements, either up or down, so spreads may widen due to uncertainty and risk.
Time of day:
Linked to liquidity – if you’re trading at busier times, you’re likely to benefit from tighter spreads. Trade out of market hours, however, and spreads are often wider due to increased risk.