What is a spread?

Logically , you have to understand , that a spread , is the green grass a person gets to enjoy ,which is in between what he has bought ( his house ) and when he intends to sell his house ( and hit the road).

So, a spread can mean, what an individual earns (or a difference earned) from the amount paid to get that security, and the amount you get for selling such a security. The net difference that you earn!

So there are many definitions, and types of spread that you will get the opportunity to learn about in the following article:

What does an underwriting spread mean?

In underwriting , the spread can mean the difference what you pay to the person who issues you the security and what price you get from the investor who invests in that security. Thus the cost the underwriter pays to buy a scrip issue (group of stocks) compared to the price which the underwriter manages to sell to the public at!

Thus you can also understand a spread as a gap in-between the short position and a long position that a person takes up in the course of the market.

What is the meaning of spread in the profession of lending?

In lending, the spread is the price a borrower pays for a loan above a benchmark yield (the rate of interest actually charged to the borrower). For e.g.:  if the prime interest rate of a loan is 3% and a borrower pays a mortgage interest of 5% , the spread over here is 2% ( 5% - 3%)!

These types of spread are also known as a yield spread or a credit spread. The difference between quoted rates of return between two different investment vehicles, the vehicles differing in quality.

Some analysts refer to this as the “yield spread of X over Y”

Option-Adjusted Spread

To discount a security’s price and match it to the current market price, the yield spread must be added to a benchmark yield curve. This adjusted price is called option-adjusted spread. This is usually used for mortgage-backed securities (MBS), bonds, interest rate derivatives and options.

For securities with cash flows that are separate from future interest rate movements, the option-adjusted spread becomes the same as the Z-spread.

Bid-Ask Spread

The bid-ask spread is also known as the bid-offer spread and buy-sell. This sort of asset spread is influenced by a number of factors:

1.            Supply or "float" (the total number of shares outstanding that are available to trade)

2.            Demand or interest in a stock

3.            Total trading activity of the stock

For securities like futures contracts, options, currency pairs and stocks, the bid-offer spread is the difference between the prices given for an immediate order – the ask – and an immediate sale – the bid.

For a stock option, the spread would be the difference between the strike price and the market value.

One of the uses of the bid-ask spread is to measure the liquidity of the market and the size of the transaction cost of the stock.

For e.g. : the bid price ¥1073.60 & ask price is ¥1074.41 , thus a spread of ¥0.80 , which could suggest a company is highly liquid , and has  a good amount of trading volume in the market

KEY TAKEAWAYS

In finance, a spread refers to the difference between two prices, rates or yields

One of the most common types is the bid-ask spread, which refers to the gap between the bid (from buyers) and the ask (from sellers) prices of a security or asset

Spread 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!