What is spread in trading

Spread is the value of the range between the ask and buy prices (bid-ask spread). 

In a broader sense, in the financial sector, the spread is the difference in prices for the same asset or similar assets. This term also defines the difference in the level of profitability of different financial instruments.

The spread in trading is clearly visible in the order book as the difference between the best buy price and the best sell price.

What is stock spread

Stock spread is the direct income of the exchange from providing access to margin trading. 

It can be fixed or variable.

A Fixed Spread

The size of the fixed spread is agreed in advance in the offer agreement.

Its width depends on the liquidity of the asset: the higher it is, the thinner the spread the broker can offer. A narrow spread makes trading on the exchange more profitable.

Most often, the spread on the exchange is expressed not in absolute value, but in points.  Thus, it has the same units of measure for assets with different values.

If you are trading on margin and place market orders to buy or sell cryptocurrencies, you need to keep it in mind that they will be executed taking into account a fixed spread.

A Floating Spread

A floating spread is a difference between the buying and selling price of assets with low liquidity. The lower the liquidity, the wider it is. The amount of spread largely depends on market volatility.  The moment an exchange shakes from fundamental events or under informational pressure, the price of an asset begins to change sharply. Thus,  its width increases.

In the stock markets, the difference between the ask and the bid increases at the opening and closing moments of trading. There are situations when exchanges suspend their work until the normalization of market volatility.  But these extreme measures do not yet apply to cryptocurrency platforms.

How to reduce losses associated with the stock spread 

  1. Choose exchanges that declare low spreads.
  2. Learn to trade on liquid tools with low volatility.
  3. Try to use limit orders instead of market orders.

And do not forget the saying: A trader does not live by long alone, but also by short, as well as by a narrow spread!