Spread Trading in Simple Terms

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Spread trading in simple terms can be defined as the trading of spreads which means the simultaneous purchase and sale of related securities on future exchanges. Both the securities are treated as a unit while individually they are called the units’ legs.

The securities under the spread are offered for purchase at an ‘offer’ price while they can be sold at the ‘bid’ price. Profit making opportunities in spread trading arise from the difference between the ‘offer’ and the ‘bid’ price.

Traders can establish spreads between the same commodities over different months (inter-delivery spreads), between related commodities but for the same month (inter-commodity spreads) and between related or same commodities which are traded on different exchanges (inter-market spread).

As customers, you should understand that you should pick up firms and platforms that offer tight spreads as this reduces the cost of placing the trade. As an example the cost of a spread trade where the spread trading is £10 for each point with the spread being 2 points, would be £20. A wider spread say of 3 or 4 points would mean higher cost of opening and closing the trade. Therefore, you should opt for firms and platforms that offer tight spreads.