What is the spread "price difference"?
Spread is defined in trading terms as the amount of points between the asking price and the bid price. On the trading platforms, any asset has two prices and the the difference between them is the spread. This difference is the right of the firm upon opening a new transaction.
- Asking Price (ASK): is the highest price in which you can buy.
- Bid Price (BID): is the lowest price in which you can sell.
Spread varies among firms, so some brokerage firms reduce it in order to attract more customers, i.e. for competition, because low spreads increase profits.
Types of Spread:
There are two types of spread available in brokerage firms such as Investing1. Namely:
Significance of Spread for the Trader:
As we have learned, spread is a fraction of the points taken by the brokerage firm as a fee for opening a transaction. The spread may affect the trader when opening more transactions. For example: If you open 8 transactions with a spread of 2 points, you lose 16 points.
Therefore, attention must be paid to the amount of spread offered by the brokerage firms and to choose those which offer the lowest spread possible.
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