One of the most important factors when deciding where to trade is the quality of the bid offer spreads available. Many newcomers will settle down at one site and do all their trading at that particular site, however you will find many different companies offering different bid-offer spreads for the same financial product. While these differences may seem small they can make a huge difference when placing a size-able trade. It can also make a huge difference to your profit and losses over the long term.
Take a look at the following CFD example.
Big Banking Corp. Bid Offer Spread Trade Size Buy Trade Closed @ Profit
Company A 400-404 350 407 £10.50
Company B 400-402 350 407 £17.50
In this particular example the difference in spread of 2 Points led to the trader who placed his trade with the second company making £7 more profit on that particular trade. But in reality the situation is even worse for the trader, trading with the first CFD provider because his chance of making a profitable trade is significantly worse. Say for example Big Banking Corp’s share price peaks that day at 403 and both traders decide to close there position at that price. The trader who traders with company A takes a £3.50 loss while the trader with Company B takes a £3.50 profit, that’s a difference of £7.
The difference in picking the company who offers the best spreads can be even more pronounced when one is engaged in Financial Spread betting. Take a look at the following example.
Cement Mixers Ltd. Bid Offer Spread Bet Size Sell Trade Closed @ Profit
Company A 98-102 £3 90 £24
Company B 100-101 £3 90 £30
Here the difference between the two companies in this particular example is £6 of profit while this doesn’t seem much it is significant. Not all of your trades will be successful by shopping around for the best spreads you maximize your potential returns in two different ways.
- By getting the best spreads you increase the possibility that the trade will enter into a profitable position.
- By getting the best spreads you increase the earnings you make from your profitable trades and minimize the losses made on your failed trades. Which can make a huge difference over the course of say a year.