UK Accounting Glossary
Spread can mean several different things to investors, depending on the nature of the investment. In the case of stocks or other assets, the spread is the difference between the bid price and the ask price. The size of the spread is affected by the total number of shares trading outstanding, demand for the asset, and total trading volume.
In the case of options, spread refers to the act of purchasing a long call option and a short call option, or a long put<put option and a short put option; each option is then half of the spread. An option spread usually costs less and with lower risk, but has less profit potential than taking a long position outright.
In the case of commodity futures, spread can be the price difference between delivery months in a given market, or the price difference between different contracts or related contracts in a given market. Spread can refer to two strategies in the case of foreign exchange. In the first foreign exchange spread strategy, investors take a long position in one currency and a short position in another. For example, long the U.S. dollar and short the yen. In the second spread strategy, investors take a long and short position in the same currency, but in different months. For example, long the yen in March, short in April.
For fixed-income securities, spread can mean the difference in yield between securities that have the same quality rating but different maturity dates, or the difference in yield between securities with the same maturity date but different quality ratings.
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This glossary post was last updated: 5th February 2020.