Spread is the yellow zone in which buyers and sellers of securities make their daily bread.
In the pits of the NASDAQ, MSFT is offered for $57.31 to buy, and if you're looking to sell MSFT, you'll only get $57.25. There's a 6-cent spread there. Bonds are bought and sold in similar fashion. So when a spread is reduced, it means that instead of there being, say, 6 cents, there's only 3.5 or whatever for the MSFT-inventory-stockers to live on.
What causes a low spread? Eh. Low volatility. Huge volume. Tons of competitors all selling the exact same commodity (a share of MSFT). So that's reduce spread in a stock trade.
The term also applies to bonds, where most taxable bonds are priced as a "spread to treasuries," i.e. U.S. Treasury Bonds. So if a UST is coming due in 5 years and pays 2.7%, then a corporate bond will cost...more. Almost undoubtedly. (A few one-off tiny diversions from that pattern exist in history anomalously, like in the head of the 2008 mortgage crisis, but that's about it.)
So if a really solid credit company like Apple wants to borrow similar 5-year paper, they might pay 2.85% for the privilege...and you'd say that their Spread to Treasuries is 15 basis points. You don't have to state that they're trading higher than Treasuries. That's a "duh."
Nothing's safer, even still today, than Uncle Sam's signature.
Related or Semi-related Video
Finance: What is Spread?48 Views
finance a la shmoop. what is spread? before we start just no. get your mind
out of the gutter. spread refers to the money value between [100 dollar bill]
a bid and ask price under a market maker structure of trading securities. no more
wire hangers, a plastic hanger company is publicly traded on an exchange like
Nasdaq where buyers bid for a price to purchase and sellers ask for a price to [Nasdaq wall shown]
trade. no more wire hangers is bid this moment at 37:23 a share by buyers
willing to buy right now at that price and is being asked at this moment at a
price of 37.31. note the eight cents a shared difference in the share prices.
that dif is the spread between the two prices, and it's worth noting that in [bread is buttered]
extremely volatile stocks, the spread widens. and in boring highly liquid
stocks which don't move much, the spread tightens or is narrower. that is on a
volatile equivalent of no more wire hangers the spread might grow to 20 or
30 cents a share whereas a boring name that pays a big dividend and the stock
never moves much we're thinking AT&T here, [man snores at a desk]
well that spread might be just three or four cents. so why grow? well because a
market maker in a volatile stock doesn't want to be caught losing money on her
inventory. if no more wire hangers suddenly gapped down to 37.10 a share [equation shown]
well it would be likely less than the average of what the market maker paid
for her quote "inventory" unquote in that stock from which he was making a market
in it. each time the shares trade the market makers dip into that spread to [woman dips cracker in butter]
pay their bills and allow them to keep doing business. so that's spread. and it's
not the type that Prince used to sing about. [man on stage]
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