Spread

Key Highlights

• A spread in finance is the difference between two related prices, rates, or values.

• Types of spreads includes bid-ask spread, yield spread, lending spread, spread trades and options spread.

What is Spread?

A spread in finance is the difference between two related prices, rates, or values. It’s a key concept used across financial markets, and its meaning depends on the context.

Types of Spreads

• Bid-Ask Spread: This is the difference between what a buyer is willing to pay for something (like a stock) and what a seller wants to get for it. A small spread means it’s easier and cheaper to trade, while a larger spread suggests higher costs and less trading activity.

• Yield Spread: The difference in returns (yields) between two bonds, like a government bond versus a corporate bond.

• Lending Spread: This is the difference between what a bank earns from giving out loans and what it pays to people who keep money in savings or what it borrows at.

• Spread Trades: A trading strategy where you buy one asset and sell a related one, betting on the change in the gap between their prices.

• Options Spread: A strategy in options trading where you buy and sell different options on the same asset to manage risk or lower potential losses.

Why Spreads Matter?

Spreads give you a snapshot of market conditions, like how easy it is to trade, how risky something is, or what the market expects in the future. They affect trading costs, profits, and investment choices. Watching spreads can help you spot shifts in the market, like growing risks or changing economic trends.