TeachMeFinance.com - explain spread
spread -- (1) the difference between the interest rate at which money can be lent (the return on investments), and the rate at which money can be borrowed (the cost of funds). (2) the difference between two related prices. (3) the difference between the bid and asked prices of securities.
Spread -- A spread is like a straddle a double privilege, a put and a call combined. If the stock goes below the price named in the put end. (or part), plus the cost of the spread, the holder of the spread profits ; so, also, if the stock goes above the price named in the call end (or part), plus the cost of the call, the holder of the call profits. Illustration : A spread on 100 shares may be bought on which the stock may be called (called for) at 102.5, or put (delivered) at 97.5. Say, 2.5 per cent ($250) is paid for the spread. Then the stock must go above 105 or below 95 before there is a profit in the spread. If a dividend becomes due on a stock during the pendency of a spread on it the dividend goes to the holder of the spread if he elects to receive and pay for the stock, but it goes to the seller of the spread if the stock is put (delivered) to him. A dividend always goes with the stock. For additional information see Privilege. The term spread is also applied to an arbitrage operation in a commodity (grain, cotton or coffee, etc.) and also in a stock when different prices prevail normally as well as from fluctuations for the same thing in different markets. The thing is sold in one market and simultaneously bought in another to be subsequently bought where it was sold and simultaneously sold where it was bought. In grain, for instance, there is a normal difference in price between two markets equal to the cost of transporting the grain from the market where the lower price prevails to the market where the higher price prevails. To permit a profit on a spread the difference in price between the two markets must be greater than the normal difference.
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