What Does Having a Wider Spread in Finance Mean?

What Does Having a Wider Spread in Finance Mean?
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In finance, the term "spread" most commonly refers to the difference between the "bid" price and the "ask" price of a security or other asset. More simply, it's the difference between the price you would receive for selling an asset and the price you would pay to buy the same asset. The wider the spread on something, the higher the risk and the more volatile the price.

Bid-Ask Spreads

Stocks, bonds, gold, commodities, currencies and other financial assets are commonly traded through exchanges or networks, which match buyers and sellers. The riskier the asset, the fewer potential buyers there are for it, and the less those buyers are willing to pay for it. That pushes "bid" prices down. At the same time, owners of riskier assets expect a higher return on them, which elevates "ask" prices. The result is a wider spread. The asset has a higher liquidity risk (meaning it's harder to sell), and when deals are made, prices are more volatile (meaning they're more prone to big movements). When there are a lot of buyers and sellers for something, such as a popular stock, the spreads get very small.

Credit Spreads

Spreads can also refer to "credit spreads." A credit spread is the difference in the yield between two bonds or other investments with similar time frames but different levels of risk. For example, if a 10-year U.S. Treasury security has a yield of 3 percent and a 10-year corporate bond has a yield of 4.5 percent, then the credit spread is 1.5 percentage points. The wider the credit spread, the riskier the higher-yielding investment is seen as being in comparison to the lower-yielding one.