The Spread and the Bid-Offer Price Explained

What Is the Spread?

The spread represents the difference between the selling and buying prices (also known as the bid-offer price) presented by a spread betting company.

For instance, if a share is offered with a buying value of 240 dollars and a selling price of 244 dollars, then the spread is 4 dollars. When executing a bet based on a spread, the trader will bet a sum of money on each increment of change in the value of the selected asset.

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Each spread bet exists for a limited lifespan demoted by a preselected expiry time. However, investors can opt to close their positions earlier if they evaluate that such an action would be beneficial for them by recording a profit.

In contrast, traders can also select to terminate their positions before expiration in order to minimize losses should price be moving against their trades. As the expiry time nears, you have the choice to either allow your trade to close or you can elect to roll it over by paying a small commission.

You can also provide increased protection for your deposit by restricting the total size of your loss. You can achieve this objective by instigating a ‘stop-loss’ facility into your bet. This means that you will then not have to constantly monitor the markets as your trade will be automatically terminated if price progresses against your position and activates your selected stop-loss.

The Implications of Spreads

The difference between the ask price and bid price of an asset is termed the spread.

For example, envisage that you plan to trade currency pairs by spread betting. As such, when you purchase the base currency of a pair then you do so at a price termed the bid price. When you study the quote of a currency pair, then you will observe the bid price is the one positioned on the left. For example, in the diagram below, the USDCHF is 0.9768/73. In this case, your bid price is 0.9768.

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Similarly, you can buy your quoted currency at its Ask price which appears on the right of a currency pair’s quote. For example, in the above diagram the Ask price for the EURUSD is 1.3955.

The spread between the Bid and Ask prices represents your broker’s commission.  For example, if you bought the EURUSD at 1.3955, it would only be worth 1.3952 if you sold it immediately afterwards. You would have made an instant loss of 3 pips which is your broker’s spread commission. You can clearly see from this example the need to seek those spread-betting brokers that clearly offer the lowest spreads possible. This is because you must gain the spread in order to just breakeven for every spread bet that you execute.

Comparing Spreads for Different Spread Betting Brokers

With the advent of online trading, smaller traders, such as you and me, can now gain immediate access to spread betting using the trading platforms provided by retail Brokers. The following guides allow you to compare spreads for the most popular underlying instruments.

 

Market Makers are the more common type of spread betting broker. They normally act as intermediaries to the inter-bank market. Very importantly, you must realize that they perform this task by trading large units of currency on the inter-bank market and then supplying smaller units to the smaller traders. This implies that should you employ the services of this type of broker, then you could find yourself in direct competition with it when you are spread betting. For instance, you could experience the following problems:

1.       You may find that the spreads that you are offered may not be the most competitive because they are single sourced.

2.       Unscrupulous Market Makers could action unethical tactics, such as price spiking, in order to activate your stop-losses. They have also been known to increase spreads just as new trades are open.

3.       In general, you must always be on guard because brokers gain increased profits if they utilize methods to expand the size of the spreads that they offer their clients.

You must not misjudge the influence of spreads on your potential profits. This is because you have to win at least the spread to just breakeven. For instance, if the spread between the bid and ask prices of the currency pair you want to trade is 4 pips; you will need to gain these four pips before recording a profit. You spread-betting broker’s fee for this particular position will be those four pips.

You will discover that every asset exhibits its own unique behavioral features. Consequently, if you have just started trading then you should initially focus on the most commonly traded assets until you acquired more trading knowledge. By doing so, you will then be able to benefit from several key features of such securities, e.g. consistently low spreads and high liquidity. In addition, you need to appreciate that the majority of spread-betting transactions will involve the most popular assets.

Specifically, you must target those brokers that can offer you the smallest spreads. You should also research into whether you will have to pay rollover charges which are the costs that are generated when your open positions are extended past their original expiry time.

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