In financial markets, the spread refers to the difference between the bid price and the ask price of an asset. Essentially, it represents the broker's profit margin on a trade.
Spread = Ask Price - Bid Price
Example:
Imagine you want to buy (go long) or sell (go short) shares of Company ABC.
Bid Price: The highest price a buyer is willing to pay for Company ABC shares. Let's say it's $99.50.
Ask Price: The lowest price a seller is willing to accept for Company ABC shares. Let's say it's $100.00.
In this scenario:
Spread = $100.00 (Ask Price) - $99.50 (Bid Price) = $0.50
If you buy the shares, you'll pay the ask price ($100.00). If you immediately sell them, you'll receive the bid price ($99.50). The $0.50 difference is the spread, which goes to the broker or market maker.