spread
The difference between the bid price and ask price of a security, or between two interest rates.
Example
“The tight spread on the currency pair indicated high liquidity in the market.”
Memory Tip
Like butter SPREAD on bread — the spread fills the GAP between the buy and sell price.
Why It Matters
The spread directly affects how much you pay when buying or selling investments and how much interest you earn or pay on loans. A smaller spread means lower costs for trading stocks or bonds, while a larger spread on savings accounts versus loan rates affects your overall wealth building strategy.
Common Misconception
Many people think the bid and ask prices are set by the exchange or regulator, but they are actually determined by market makers and competing traders based on supply and demand. The spread is not a fixed fee but rather reflects the market liquidity and how quickly you can buy or sell at those prices.
In Practice
When you look at a stock trading at a bid price of 50.10 dollars and an ask price of 50.15 dollars, the spread is 0.05 dollars per share. If you buy 100 shares, you immediately lose 5 dollars to this spread because you pay 50.15 but the market bid is only 50.10, meaning you would need the stock to rise more than 0.05 dollars just to break even.
Etymology
From 'spread' (to extend) — the gap that extends between two prices.
Common Misspellings
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Related Terms
More in trading
Other trading terms you should know
See Also
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