Spread

RECENT NEWS
The Essentials of Trading  Oct 17  Comment 
It's been my experience that many people don't really understand how the bid/offer spread plays a part in all markets, including the one for stocks. This post looks to remedy that.




 
TOP CONTRIBUTORS

This page is about the Bid/Ask spread. For spread options positions, see the article on Options - Spread

Spread refers to the difference between two positions or prices. Generally, spread refers to the difference between the ask and the bid price of a security. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measured between debt instruments of differing maturities, credit ratings and risk.

However, spread can also be used to refer to other comparable differences. A credit spread refers to difference in yield between two bonds of different quality or maturity. An options spread refers to the difference between the strike price of the option, and the market price of the underlying security.

Looking at the yield spread, often with historical spreads, can give investors ideas for potential investment opportunities.

For example, if the five-year Treasury bond is at 5% and the 30-year Treasury bond is at 6%, the yield spread between the two debt instruments is 1% (6% - 5%). If the yield spread has historically been closer to 5%, the investor is much more likely to invest in the five-year bond compared to the 30-year bond (as it should be trading around 1% instead of 6%).

In other words, if the 30-year bond is trading at 6%, then based on the historical yield spread, the five-year should be trading at around 1%, making it very attractive at its current yield of 5%.

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki