As a trader, it’s essential for you to know about spreads and their implications for the overall performance of your stock portfolio. Simply put, the spread represents the difference between the bid price (selling price) and the ask price (buying price) of an asset. Usually, the ask price is higher than the bid price. It can be quoted as either a fixed amount or as a percentage of the value of your positions charged by your broker in exchange for the services it provides you.
In other words, this small price difference is usually the way your online broker makes money. In addition to spreads, some brokers might also ask you to pay additional commission on certain asset types.
There are 2 main types of spreads: fixed and variable. Fixed spreads do not change, regardless of trading conditions, such as high market volatility. Variable spreads, on the other hand, change depending on demand for the underlying asset, or uncertainty in the market.
You should carefully consider your trading style and the price evolution of your favourite assets before deciding which spread type suits you best. For day and swing traders, who thrive on volatility and tend to rely on a combination of technical indicators and gut instinct, fixed spreads could be beneficial. Variable spreads might be more appropriate for position traders, who prefer far longer time horizons, a more fundamental approach to decision-making, and less dramatic price movements.
Trading conditions – including spreads – are important criteria to take into account when choosing your broker. If you are an intra-day trader, fixed spreads can certainly help you manage your trading costs more effectively. If you are a news trader, and like to intervene in volatile markets, it is important to understand that spreads usually widen when important statistics such as growth, inflation or employment figures are released, and when major events such as elections occur.
To realise a profit on your trades, prices need to move in your desired direction and beyond the cost of the spread, and in cases where spreads are larger, it can be more challenging to generate positive returns on a position.
CFDs broker UFX is among the most well-known forex and CFDs brokers in the industry, and offers competitive spreads and trading conditions depending on the kind of trading accounts you use. For example, the company’s Premium accounts, such as its GOLD and PLATINUM options, offer the very best trading conditions, with tight spreads and lower margin requirements.