A spread refers to the difference between two prices, rates, or yields. In financial markets, it is most commonly used to describe the difference between the buying price (ask price) and the selling price (bid price) of a security, asset, or commodity.
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The spread indicates the liquidity and transaction cost in the market.
A narrower spread usually indicates a more liquid market with more buyers and sellers, while a wider spread often indicates lower liquidity and higher transaction costs. The spread can also refer to the difference in interest rates between two financial products, such as the spread between long-term and short-term bond yields.
Short example:
Suppose a stock has a bid price of $49.90 and an ask price of $50.00.
The spread is $0.10, which is the difference between the two prices. If an investor buys the stock at $50.00 and later sells it at $49.90, they would incur a loss of $0.10 per share due to the spread.
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