Every week we provide insights into popular assets and hot questions so you can easily learn more about the investment market in bite‑sized pieces.
In this Markets in Focus, we take a closer look at the spread - what it means in trading and why it matters.
What Is a Spread
In finance, a “spread” generally refers to the difference between two prices. In trading, it’s the gap between the bid price (the price at which you can sell) and the ask price (the price at which you can buy).
This difference is a core cost in CFD trading: the tighter the spread, the more favorable it is for the trader.
How Spread Works in Trading
- When you trade instruments like CFDs, you either take a buy or sell position depending on whether you expect the asset’s price to go up or down.
- The spread represents the cost of entering a trade — because you’re buying at the ask price and selling at the bid, you start with a small built‑in loss.
- Therefore, a narrower spread is always more beneficial: the smaller the difference, the less you pay, and the faster your position can become profitable.
Bid‑Ask Spread Explained
- The bid‑ask spread is calculated as the difference between the bid and ask price of an asset.
- The size of the spread reflects market conditions:
- A narrow spread suggests high liquidity and a strong agreement in price among traders.
- A wide spread indicates less agreement or lower liquidity - there may not be enough buyers or sellers at a specific price.
What Influences the Spread
Several factors determine how wide or tight a spread can be:
- Liquidity
- High liquidity assets (frequently traded markets) normally have narrower spreads.
- Less liquid or niche assets usually carry wider spreads.
- Volatility
- During periods of high volatility, spread often widens — market makers increase spreads to hedge risk.
- Traders sometimes take advantage of these wider spreads by trading volatility spikes.
- Asset Price / Size
- Lower-priced or less liquid assets often have higher volatility and wider spreads.
- Bigger, more established, or higher-priced assets generally exhibit tighter spreads due to more stable demand.
Why Spread Matters
- Trading Costs: Spread is one of the primary hidden costs in CFD trading — you pay it every time you open a trade.
- Strategy Impact: Knowing the typical spread for an instrument helps you choose which ones to trade and when.
- Risk Assessment: A wide spread can erode potential profits or make short-term trades less viable.
Final Thoughts for Your Trading Week
We wish you a successful trading day on the Change App - and remember, always check the spread before placing a CFD trade. It’s a simple yet powerful way to optimize your cost and risk management.
Until next week!
