What is the spread? Definition and meaning
The spread is the difference between the prices of two items or the difference between one interest rate and another. In the buying and selling of stocks, it is the difference between the current bid and ask prices of a company share – usually referred to as the bid/offer or bid/ask spread.
The underwriting spread is the difference between how much the underwriting group paid in a new issue of securities and how much the securities are offered for sale to the public. As far as the underwriters are concerned, the spread is their profit margin.
In bond trading, the term refers to the difference in the yield of bonds with different maturities but the same quality, or the same maturity but different qualities.
In the futures market, it is the difference between different delivery dates for the same commodity, currency or asset.
The spread can mean the difference between the bid and ask price of a share – which in this case is one dollar.
The Z-spread of an MBS (mortgage-backed security) is the parallel shift over the zero-coupon Treasury yield curve required for discounting a pre-determined cash flow schedule to arrive at the MBS’ current market price. The term is commonly used in the CDS (credit default swap) market as a measure of credit spread that is comparatively insensitive to the particulars of specific government or corporate bonds.
According to The Free Dictionary by FARLEX, the spread is:
“(1) The gap between bid and ask prices of a stock or other security. (2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months. Also known as a straddle.”
“(3) Difference between the price at which an underwriter buys an issue from a firm and the price at which the underwriter sells it to the public. (4) The price an issuer pays above a benchmark fixed-income yield to borrow money.”
In investment markets, when the spread is wide, we say there is a wide market.
Spread in statistics
In statistics, the term – often referred to as dispersion – is a method of describing how spread out a set of data is.
When a set of data has a large value, those values in the set are scattered widely – when it is small, the values in the set are clustered tightly.
Statistics How To says: “The spread of a data set can be described by a range of descriptive statistics including variance, standard deviation, and interquartile range.”
In this example of spread betting, provided by IG Group Limited, you bet £10 per point long on Apple – The market price increases 0.45 points – You close the position for a £300 profit (£10 x 30). (Image: adapted from ig.com/uk)
What is spread betting?
Spread betting is a form of gambling in which the person who is placing bets – the bettor – wins or loses money according to the margin by which the value of a specific outcome varies from the bookmarker’s spread of expected values.
It is also a tax-free way to speculate on the movement of prices of a financial market without owning the underlying asset. Instead, the players predict whether their market’s price will go up or down – how right or wrong they are determines how much money they have made or lost.
“When financial spread betting, the outcome you’re speculating on is the direction in which the price of a financial instrument will move. If it moves the way you predict, your profit will grow the further it goes. However, if the market moves against you, your loss will also increase as the price movement becomes greater. Betting on the price increasing is referred to as going long, while betting that it will decrease is called going short (or ‘shorting’).”
Video – Concept of spreads in foreign exchange
This Plan B Trading video looks at the concept of spreads when trading forex (foreign exchange).