Spread trading in simple terms means betting on the future movement of the underlying security or instrument. A trader places a buy bet when he believes that the price of the instrument in the future would rise while he would place a sell bet if the prices are expected to fall in the future.

Spread trading involves two prices for the instrument. One of these prices is the ‘offer’ price, which is the price at which the instrument can be purchased and the second one is the ‘bid’ price, which is the price at which the trader can sell the instrument. The difference between the two prices is called the spread.

The movement of the instrument underlying in the trade is measured in points. For example, a $10-a point trade with a 2 point spread would initiate a trading cost of $20. The difference of points between the opening bet and the closing bet when multiplied with the value of the bet per point ($10 in this case) denotes the profit or loss made by the trader.

As traders, you must choose platforms or firms that offer a tight spread as this would lower the cost of placing the trade. In the above example, the trader would start making profit if the spread moves beyond two points.