What is ‘Spread’ in the Financial Markets?
Forex, finance and investment are sectors that are often filled with jargon, and most newcomers to the field can’t be blamed for being confused when they’re confronted with a list of investment terms for the first time. It’s okay: For about the first week, everyone feels just like you.
When people talk about the spread in investment terms, they’re usually referring to the difference between the asking price and the selling price of a stock. This is what you’ll be quoted by an individual trading platform to trade the stock, and each of the two have their own advantages, disadvantages and reasons to choose them when trading.
There are also variable and fixed spreads when you’re about to make a trade. Fixed spreads are usually considered to be the ones that come with considerably less risk. It is not well understood that one of the biggest costs in trading CFD’s is the spread. Fixed spreads mean your cost stays the same. Variable spreads mean your costs might increase considerably – just when you are wanting to exit!
Here’s why spread matters to you when you’re a new CFD investor – and how you can make sure you make the best choice to maximise your trading profits and reduce your trading costs.
Fixed Versus Variable Spreads
When we’re talking about CFD or online trading, investors are given the option of either a fixed or variable spread when choosing a broker.
Anything that’s fixed in investment terms usually refers to something that’s fixed in one place and won’t fluctuate over time or circumstances, such as fixed-term leases, fixed-term deposit accounts and fixed spreads.
Usually, fixed term spreads are recommended for first-time traders (and we’d say that we agree!): They’re less risk, they’re less fuss, they’re less likely to move around in an unpredictable way that can cost you money – and they’re more likely to get you at least your initial investment cost back in returns, even when the rest of the stock market tanks.
Fixed spreads are the best choice when seeking an investment that comes with less risk.
So, what about variable spreads? These are the rebellious children of the investment world, and you have to be a little more careful with these as an investor because they’re more likely to fluctuate along with the rest of the market. It’s this fluctuation that makes them carry a considerable amount more risk when you’re about to invest, but it’s also this high level of fluctuation that can make them a great choice when things go your way.
Variable spreads can lead to more return, but they’re far more risky to invest in – and yet they’re the first option offered to beginners in the stock market even when they’re not the best choice for them by any means.
Wider spreads mean that the difference between the buy-and-sell price is vast, while closer spreads make for a smaller difference – and a less risky spin of the Wheel of Fortune for investors who are watching the market.
Spread and CFD Brokers
When you’re about to make a trade for the first time, your broker will usually give you a twofold option between either spread – and you’re usually told to opt for variable. We’ve just told you why this isn’t necessarily the best choice for beginning investors, and it’s obvious from this that you should find a cfd broker that can meet you in the middle.
CFD brokers earn their money with commission that’s charged on the deals they trade with, and this is where many investors end up paying the salary for their broker outright without even realizing it.
When you actively make your first trade, your balance will go into a negative immediately – this is the money that you’ve spent on the deal, and this is the money that you’re paying the broker to make the trade on your behalf. If you went with a wider, variable spread, you’re taking the chance that this deal could go completely belly-up and you could get entirely screwed – especially if you’re an experienced trader who put all of their eggs in one basket.
Consider this, and you’ll start to see why variable, wide-spread trades aren’t considered a great deal for first-time stock traders – not even on the advice of their broker!
Sometimes these wide, variable spreads can be greatly beneficial and earn you more than your initial investment back – but sometimes they won’t, and you should rather opt to avoid taking this risk at all if you don’t feel completely confident of your trading abilities and trust your broker.
Choosing Your Broker
The wide-spread is often how brokers make their money, and if you feel that the spread is too wide to take the chance it’s usually best to go with your gut feeling – even people who think they know the market can make mistakes, and it’s usually their gut feeling that would have been right about the trade.
When should you choose another broker?
If you feel like your stock broker is ever leading you on or providing you with information that’s benefiting them more than it is you, it’s time to switch brokers. If you feel like your stock broker is acting in their own interests more than they are yours, the same advice applies, and it’s better to find someone else to trade with for the long haul.
You should also pick a different stock trader if you feel like your stock broker is deliberately putting your investment and money at risk by investing in riskier trades, or if you’ve given your stock broker a specific instruction and they acted against it to the demise of your money. After all, you’re the one paying for the investment – and it’s still your money that they’re risking.
Ideally, you should choose a broker that gives you peace of mind – and one that acts in interests that’ll benefit the both of you at the same time. Find a stock broker that can work with you instead of against you – and you should be set for the long run – and protected against any unnecessary risks that your broker could take.