What is a "spread" in trading?

What is a "spread" in trading?

• A. The percentage difference between two securities
• B. The difference between the bid price and the ask price of a security
• C. The total profit made from a set of trades
• D. The range of prices for which a security is listed

Answer: (B)

In trading, a "spread" specifically refers to the difference between the bid price and the ask price of a security. The bid price is the highest price a buyer is willing to pay for a security, while the ask price is the lowest price a seller is willing to accept. This difference signifies the liquidity and market depth for that security—smaller spreads typically indicate a more liquid market with a higher volume of trading, while larger spreads can suggest less liquidity and fewer transactions. Understanding the spread is essential for traders, as it affects the cost of entering and exiting positions. If a trader buys at the ask price and later sells at the bid price, the spread represents an inherent cost. Hence, accurately grasping the concept of the spread allows traders to make informed decisions regarding timing and pricing in their trades.

In trading, a "spread" specifically refers to the difference between the bid price and the ask price of a security. The bid price is the highest price a buyer is willing to pay for a security, while the ask price is the lowest price a seller is willing to accept. This difference signifies the liquidity and market depth for that security—smaller spreads typically indicate a more liquid market with a higher volume of trading, while larger spreads can suggest less liquidity and fewer transactions.

Understanding the spread is essential for traders, as it affects the cost of entering and exiting positions. If a trader buys at the ask price and later sells at the bid price, the spread represents an inherent cost. Hence, accurately grasping the concept of the spread allows traders to make informed decisions regarding timing and pricing in their trades.