What is a spread?
At many (CFD) brokers you often come across the term spread . The term has to do with the costs that come with trading. To better explain the concept, you must first get acquainted with two other concepts.
1. The asking price . This is the amount you have to pay when you buy a share . If a share has a market value of, for example, €20, that does not mean that the asking price is also €20. The selling party can choose to sell his share for €20.01. Then it is up to the buyer whether he agrees to this price.
Hence the name ‘asking price’, it is the price that is being asked for a share at that time.
2. The bid price . This is also called the ask price. When you sell a share, you do not get the ask price for it. But the bid price. This will always be lower than the ask price. Because you sell or buy shares from an intermediary, the broker. And a broker needs margins to make a profit.
The difference between the ask price and the bid price is the spread .
The spread is the profit margin for the broker
For which investors is this important?
The spread is not that exciting for long-term investors. On the other hand, it is for active investors, especially day traders .
Day traders handle many transactions in a day. Therefore, they must be well informed about the spread of the products (for example CFD on shares) that they buy and sell. Because they continuously pay the spread and with many transactions the costs of this can be quite high.
Factors that determine the spread
There are two types of spreads, the fixed spread and the variable spread .
The fixed spread is always the same. The variable spread is not. The height of the variable spread is determined by the following factors:
Who determines the spread?
Market forces create the spread. The supply and demand of shares allows the intermediary, the broker, to keep a small part of the transaction for himself as a profit margin. = The spread.
But brokers do not always use the same spread. It is therefore worthwhile to compare brokers before buying or selling shares.
Example:
A share has an asking price of €22. The bid price is €21.85. If you already own this share and want to sell it, the broker will deposit €21.85 into your account. If you want to buy this share, you pay €22 to the broker. The asking price is what the broker asks for the purchase, the bid price is what the broker offers you when you sell.
Compare broker costs
Do you want to start investing? Then compare the spread costs that a broker charges. Compare all CFD brokers now .