The bid-ask spread is a fundamental concept that directly affects the cost and profitability of trading Share CFDs. The spread represents the difference between the bid price (the highest price a buyer is willing to pay) and the ask price (the lowest price a seller is willing to accept). While it may seem like a minor detail, understanding how the bid-ask spread works and its impact on your trades is essential for optimizing your trading strategy.
What is the Bid-Ask Spread?
The bid-ask spread is a cost that all traders must account for when entering and exiting trades. In Share CFD trading, you buy at the ask price and sell at the bid price, meaning the spread is effectively the broker’s profit on your transaction. A narrower spread reduces trading costs, while a wider spread increases them.
For example:
- If a share CFD has a bid price of £100 and an ask price of £100.50, the spread is £0.50.
- If you buy at £100.50 and sell immediately at £100, you incur a loss of £0.50 per share, even without market movement.
Factors That Influence the Bid-Ask Spread
- Liquidity – Highly liquid shares, such as those in the FTSE 100, typically have tighter spreads because there are many buyers and sellers actively trading. In contrast, less liquid shares, such as those listed on the AIM market, often have wider spreads due to lower trading volumes.
- Volatility – During periods of high market volatility, spreads may widen as brokers account for increased risk. This is especially true during major news events or earnings announcements that can lead to rapid price changes.
- Market Hours – Spreads are generally tighter during the London Stock Exchange’s trading hours when liquidity is highest. Outside regular trading hours, spreads often widen as fewer participants are active in the market.
- Broker Policies – Different brokers offer varying spread structures. Some provide fixed spreads, which remain constant regardless of market conditions, while others use variable spreads that fluctuate with market dynamics. Fixed spreads offer predictability, while variable spreads can be more cost-effective during stable market conditions.
How to Minimize the Impact of the Spread
To minimize the impact of the spread when trading Share CFDs, focus on highly liquid UK shares such as those in the FTSE 100. These shares attract more buyers and sellers, resulting in tighter spreads, smoother price movements, and reduced transaction costs. Timing is also crucial; trading during the London Stock Exchange’s peak hours ensures greater liquidity and narrower spreads, while trading outside these hours often results in wider spreads and higher costs. Additionally, compare FCA-regulated brokers to identify those offering competitive spreads and transparent pricing. Some brokers may charge commissions but compensate with tighter spreads, making them ideal for active traders.
It’s also important to factor in market conditions and the spread’s impact on your trading strategy. High volatility, while offering profit opportunities, typically leads to wider spreads, increasing costs. Plan your trades carefully by incorporating the bid-ask spread into your entry and exit levels to ensure your profit targets exceed the cost of the spread. By doing so, you can better manage transaction costs and maintain profitability, even in fluctuating market conditions.
The bid-ask spread is a fundamental cost in Share CFD trading, and understanding its impact is essential for optimizing profitability. By focusing on liquid shares, trading during peak hours, and selecting brokers with competitive spreads, you can reduce transaction costs and improve your overall trading performance. Whether you’re a day trader or a swing trader, keeping the bid-ask spread in mind will help you make better trading decisions and navigate the UK market more effectively.
