What is Spread?
What Is ‘Spread‘ In CFD Trading?
When thinking about CFD trading, you have probably come across the term “spread” and wondered what it is.
Spread is simply the difference between the bid (buy) and offer (sell) price that a broker quotes on their trading platform.
When you look at a financial asset, like the Australia 200, you will see three prices;
- the market price
- the buy price, and
- the sell price.
The buy price will always be greater than the sell price, and the market price will typically be in the middle of the buy and sell price.
Example
Say a broker is quoting a price of 25,000 – 25,003 on the Wall St 30 Rolling cash index market.
The difference between the buy and sell price is 3 points. Therefore, the spread for that particular market is 3 points.
Why Is Spread So Important?
When you open a trade with your CFD broker, your position P&L will go into minus (-) immediately. This is because you have been charged a small fee to make that trade.
Do not panic – every broker charges you to open a trade – it is one of the way’s a broker makes its money. This fee is known as the spread cost. Again, being charged this is normal and there is no need to be alarmed by this.
Important To Note:
The tighter the spread, the cheaper it is to trade. The wider, the more a broker is charging you to trade.
Tighter spreads typically mean lower trading costs. This can result in potentially better profits as the market price doesn’t have to move as far from your open price before your trade is in a profitable position.
Another Spread Trading Example:
The price of the Australian 200 index is trading at 6,000.
Broker A is quoting a price of 5,999 – 6,001 and Broker B is quoting 5,998 – 6,002.
Which one is cheaper to trade with (all else being equal)?
The answer is Broker A who is only charging you 2 points to open a trade, whereas Broker B is charging you 4 points – twice the cost to open the same trade!
Are There Different Types of Spread?
Yes, there are two types of spread a broker will offer you; Fixed spreads and variable spreads.
You can find out more about each by clicking here >.
Leading
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Australia 200 spread
Wall St 30 spread
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Spread Type
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Low-Cost
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SCB
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CFD Broker
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0.08% with $5 min.
1pt
1.6pts
From 0.5 pips
Variable