What is the bid-ask spread in spread betting?
A little information about spread betting first
Spread betting is a tax efficient way of investing in the markets*. It is known as a derivative product, with the trader never owning the underlying product. The trade or ‘bet’ is placed with the broker.
You can bet on products moving up or down, gaining or losing value. You can use leverage, allowing you to gain greater exposure to the markets than trading directly.
Unlike fix-odd betting, there is no simple win or lose scenario. Traders do not have to close their trades at any defined time or level and can even add to positions.
However, this can cause greater losses than the intended original stake. It is advisable to get acquainted with all aspects of spread betting before trading on a live account.
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*In the UK spread betting profits are exempt from capital gains tax. Please be aware that tax treatment depends on your individual circumstances and tax law may be subject to change.
The bid-ask spread
A spread betting broker will offer two prices for every product.
There will be a price where you can buy the asset. This is known as the offer or ‘ask’ price. The second price is where you can sell the asset. This is known as the bid.
It is common to hear traders say, ‘I hit the offer’ or ‘I hit the bid at 0.9552’. The latter meaning that they sold the product at 0.9552.
Why is the size of the bid-ask spread important?
You can look at the bid-ask spread as part of your ‘cost to trade’. They offer varying ‘spreads’ on different products. This is normally dependent on how liquid the underlying product is.
A liquid product like EURUSD will have a tighter spread than a product such as GBPNZD.
Figure 1 Pepperstone spreads
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