What is a spread in trading?

When online trading, the spread is the difference between the buy price and the sell price quoted. The price at which you buy is always higher than the price at which you sell, and the underlying market price will generally be in the middle of these two prices. ​​

Spreads are implemented by market makers, brokers and other providers to add costs to a trading opportunity based on its supply and demand. Depending on how expensive, volatile and liquid an asset is, the spread between the buy and sell price will fluctuate along with an assets price and trading volume.

Spread definition

The spread is usually the difference between the ‘bid’ and ‘ask’ price of an asset, however, when online trading there is no bid and ask prices available. Instead, ‘buy’ and ‘sell’ prices are used. So, the spread when trading can be defined as the difference between the ‘buy’ and ‘sell’ price of a financial instrument when spread betting or CFD trading.

The word ‘spread’ has a variety of definitions in other areas of finance, but the fundamental concept of being a difference between two prices is always evident. A spread trade is an example of this, where the purchase of one asset and sale of another occurs simultaneously with an option or futures contracts. The spread, in this case, is the difference between the short (selling) price and long (buying) price.

What is the bid-ask spread?

The bid-ask spread or bid-offer spread is a naming convention when referring to the spread of an asset. The bid represents the “buy” price, whereas, the ask price or offer price refers to the “sell” price.

The bid-ask spread of an asset is a representation of how closely aligned the supply and demand are for a particular asset. If the bid-ask spread is very tight, there is a common consensus on an assets price. However, if there are some disparities between buyers and sellers opinions on an assets worth, the bid-ask spread is generally wider.

The bid-ask spread is influenced by a number of factors including:

  • Liquidity. The most evident factor, liquidity, is determined by the volume of trades. A liquid asset can easily be converted into cash whilst an illiquid asset can be hard to convert into cash. Some assets may be traded rarely causing wider spreads, whereas others that are traded regularly will have tighter spreads.
  • Volatility. When markets are fluctuating with large increases and rapid declines, the market’s spread is usually much wider. Market makers can use volatility as an opportunity to increase their spreads whilst traders attempt to profit from the fluctuations.
  • Price. Linked to both liquidity and volatility, when an assets price is low, volatility is much higher and liquidity is much lower causing a wider spread. The opposite is true when an asset is more expensive.

How does the spread work?

The spread is a crucial piece of information to be aware of when analysing trading costs. An asset’s spread is a variable number that directly impacts the value of the trade based on how tight the spreads for that financial market are.

Spreads are constructed around the current price or market price of an asset. Market makers and brokers may add some transactional costs in the spread to simplify the transaction process, this can be particularly prevalent in forward and futures contracts.

The spread is one of the key costs involved when online trading – the tighter the spread, the better value you're getting as a trader. We offer consistently competitive spreads, with our spreads starting from just 0.7 points for EUR/USD and USD/JPY, and from 1 point for the UK 100 and Germany 30 indices. Tight spreads mean that you can make a profit or loss from even small movements in price. See our range of markets page for more information about our spreads. ​

​​Once you have placed your trade and either selected buy or sell on a particular product (eg US 30), you will be looking for that market to move further than the price of the spread. If that outcome is achieved when you close your trade, you'll make a profit by buying your sell trade, or conversely, selling your buy trade.

​​Note that there are other potential costs to consider, for example some markets involve a commission charge or a combination of spread and commission.

The spread is calculated using the last large numbers of the buy and sell price within a price quote.​

Spread examples

Example 1

The spread on the UK 100 shown here is 1.0, calculated by subtracting 6446.7 (sell price) from 6447.7 (buy price).

6447.7 - 6446.7 = 1.0 spread

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Example 2

The spread on the GBP/USD shown here is 0.9. If you subtract 1.65364 from 1.65373, that equals 0.00009, but as the spread is based on the last large number in the price quote, it equates to a spread of 0.9.

1.65373 - 1.65364 = 0.00009… However, the spread is based on the last large number. So the spread is 0.9.

CMC Markets

To further your understanding of spreads, you can analyse our wide range of markets. Here you can see which markets have tighter spreads than others.

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