In trading, the term “spread” refers to the difference between two prices. It’s most commonly used in one of two contexts: the bid-ask spread or the spread in yield.
- Bid-Ask Spread: In the context of the stock market or forex market, the “spread” usually refers to the difference between the bid price and the ask price for a given security or currency. The bid price is the highest price that a buyer is willing to pay for an asset, while the ask price is the lowest price at which a seller is willing to sell the asset.
- Spread in Yield: In the context of bonds, the “spread” often refers to the difference in yield between two different bonds. For instance, you might look at the spread between a corporate bond and a government bond with the same maturity date to gauge the perceived riskiness of the corporate bond.
The term can also be used in options trading to refer to a “spread strategy,” which involves simultaneously buying and selling two or more options contracts.
The spread can serve as a measure of liquidity, with a smaller spread suggesting higher liquidity, and it can also serve as a source of profit for market makers, who aim to buy at the bid price and sell at the ask price.