what is a spread 
a spread can have several meanings in finance generally the spread refers to the difference or gap that exists between two prices rates or yields in one of the most common definitions the spread is the gap between the bid and the ask prices of a security or asset like a stock bond or commodity this is known as a bid ask spread spreads can also be constructed in financial markets between two or more bonds stocks or derivatives contracts among others bond investors look at the spread to worst stw when comparing securities with similar durations understanding spreadsspreads can also refer to the difference in a trading position the gap between a short position that is selling in one futures contract or currency and a long position that is buying in another this is officially known as a spread trade in underwriting the spread can mean the difference between the amount paid to the issuer of a security and the price paid by the investor for that security that is the cost an underwriter pays to buy an issue compared to the price at which the underwriter sells it to the public in lending the spread can also refer to the price a borrower pays above a benchmark yield to get a loan if the prime interest rate is 3 for example and a borrower gets a mortgage charging a 5 rate the spread is 2 the spread trade is also called the relative value trade spread trades are the act of purchasing one security and selling another related security as a unit usually spread trades are done with options or futures contracts these trades are executed to produce an overall net trade with a positive value called the spread spreads are often priced as a single unit or as pairs on derivatives exchanges to ensure the simultaneous buying and selling of a security doing so eliminates execution risk wherein one part of the pair executes but another part fails types of spreadsspreads exist in many financial markets and vary depending on the type of security or financial instrument involved in many securities that feature a two sided market such as most stocks there is a bid ask spread that appears as the difference between the highest bid price and the lowest offer the bid ask spread is often used to judge a stock s liquidity bid ask spreads also feature prominently in forex trading and can vary depending on a number of factors including the liquidity of the currency pair market conditions and the broker s own pricing policies some brokers charge fixed spreads while others charge variable spreads that can fluctuate based on market conditions it s important for traders to understand the spreads that they are being quoted as they can have a significant impact on the overall cost of a trade spreads can be constructed in any number of ways and so a trader can use a spread strategy to profit from a bullish bearish or sideways market or if the spread widens vs narrows because of this spreading is a very flexible tool used by traders suppose an investor is considering two bonds a corporate bond issued by company xyz with a yield of 5 and a u s treasury bond with a yield of 3 the yield spread in this case would be 2 5 3 indicating that the corporate bond is yielding 2 more than the u s treasury bond if the investor believes that the risk of default on the corporate bond is low and the company is financially sound they might decide to buy the corporate bond and sell the u s treasury bond in order to profit from the yield spread this would be known as a yield spread trade if the investor s assessment of the credit risk of company xyz is correct and the bond performs as expected they will earn the 5 yield on the corporate bond and realize a profit from the yield spread of 2 however if the credit risk of company xyz turns out to be higher than expected and the bond defaults the investor could lose their entire investment in the bond this is why it is important for investors to carefully consider the credit risk of any bond before entering into a yield spread trade an illustrative example of a spread used in trading is a bull call spread this is a bullish options trading strategy that involves the purchase of a call option with a strike price that is below the current market price and the simultaneous sale of another call option with a higher strike price for example let s say that xyz stock is currently trading at 50 per share an investor who is bullish on xyz stock might buy a call option with a strike price of 45 per share and sell a call option with a strike price of 55 per share the goal of this bull call spread is to profit from an upward move in the price of xyz stock while limiting the potential loss if the stock does not move as expected if xyz stock rises to 60 per share the call option with the strike price of 45 per share would be in the money and have a value of 15 per share 60 market price 45 strike price the call option with the strike price of 55 per share would also be in the money but with a value of only 5 per share 60 market price 55 strike price the net profit for the investor in this case would be the difference between the two options or 10 per share if xyz stock does not rise above the strike price of the call option that was sold in this case 55 per share then both options would expire worthless and the investor would lose the premium paid for the call option that was purchased this is why the bull call spread is considered a limited risk strategy spread risksspread trading like any other form of trading carries a number of risks that traders and investors should be aware of for example market risk can affect the value of the underlying assets and the profitability of the spread trade thus if a trader enters into a bull call spread on a stock that they believe will rise in price but the stock s price unexpectedly drops due to market conditions the trader may suffer a loss on the spread trade likewise if you bet that a spread will narrow but it widens you can lose money in addition there are other potential risks involved with spreads 