Foreign exchange trading and the stock market offers investors a rare and possible lucrative chance to run with the big dogs of the investment world, and it’s okay if you don’t know what you’re doing at first.
The majority of investors, even seasoned ones, will most often appoint a stock broker who can take charge of trading needs on their behalf. When choosing a stock trader, there are many different things you’ll have to keep in mind before you make your choice, including the state of the stock market, individual stock prices and the experience level of your trader.
But there’s one more thing, and it’s one of the least discussed topics when it comes to the stock market – and it’s also one of the most essential things that nobody tells you about before you start.
What about the difference between variable spreads versus fixed spreads – and what abpout spreads at all? Here’s what you should know about the differences that define variable versus fixed spreads, how they fit together and what they could mean for your investment.
What’s the Spread?
In stock market and investor terms, the spread refers to the difference between the BUYING and SELLING price of the different potential stock you’re looking at.
Much like butter on bread, a wider spread means that the stock you’re looking at will be more expensive – and the difference between the two spread wider apart. On the other end, a tighter, closer spread refers to a smaller difference between buy-and-sell, and often a cheaper stock to trade with.
Aside from wide or closer spreads, you have an option between Fixed and Variable Spreads when dealing with your stock broker, and each of these can have their own pro’s and cons. For newer investors (and those who prefer their investments with much less risk), fixed spreads are usually recommended.
Here’s how you can tell the difference between the two.
What are Fixed Spreads?
When things are said to be fixed in financial or business terms, this usually means that something about the deal in question is defined beforehand and kept a constant throughout the duration of the deal.
Just think of a fixed-term lease, or a fixed deposit account.
A fixed spread is the same thing: The spread between the asking and selling price of the stock stays the same throughout the day, meaning that the spread is fixed, or sticking around in one place for the duration of business.
We can consider fixed spreads much less volatile in times that would make the rest of the stock market bob up and down like a boat on stormy waters. Instead of fluctuating with the stock market, they’ll stay the same.
Benefits of Fixed Spreads
The fact that fixed spreads will stay constant in times of a shaky stock market is only one of the advantages, but it’s the main reason why many investors opt for fixed spreads over variable ones. You can see most of the other benefits of fixed spreads rise up directly out of this fact.
First, investing in fixed spreads puts your money and investment at less risk, making it a much more popular option for investors who prefer safety, security and some kind of assurance to their investments.
But fixed spreads can also help you to save money, leaving you with more cash to invest across other stock market spreads. When you know exactly how much you’re going to save on a deal, it makes the overall trading costs go down, and you’ll get less of a surprise when it’s time to settle the bill with your broker.
What are Variable Spreads?
Variable spreads are the exact opposite of the fixed spreads we described above, and they work in exactly the way that you would imagine. Instead of staying in one place, variable spreads won’t be the same every time you look into it, they won’t stay in one place when the stock market goes up or down and they won’t quite always behave as you expect them to.
So why would anyone choose to invest in variable spreads at all? It’s one of the first options offered with a trading demo account, and it’s one of the first trades you’ll encounter as a first-time trader – even though it’s not always your best first choice as an inexperienced stock trader.
Don’t believe the hype: Most of these advertised variable spreads that you get with your demo trading account are only designed to lure you in, and if it sounds too good to be true than it usually is – and you aren’t dealing with an honest, upfront broker.
Variable spreads are the naughty children of the investment world, and while you should usually tread carefully when trading with these, it doesn’t mean that novice investors should discount their value entirely.
Benefits of Variable Spreads
Even though like investing in a variable spread is a lot like stepping onto a restless ship and sailing across the ocean, you should remember that even that long voyage got mankind to land – sometimes variable spreads are an excellent choice for investors who can stomach the risk.
When the time is right, investing in variable spreads can sometimes be much cheaper than investing in fixed spreads – and traders know this, so sometimes the great deals are hidden where people won’t think to look, and you should always go through variable spreads too to weigh up your individual options.
Variable spreads can be volatile, but they can offer you a great return and can greatly increase in value in a short time. However, this is also part of why they’re riskier – just like they can increase in value, they can also tank.
Large, variable spreads can make great investments – but they’re few and far between, and we’d suggest that starting investors stick to the fixed spreads for the beginnings of their investment journey.
Especially when you’re still building experience and trying to cut down on the amount of risk that you’ll expose your initial investment to, fixed spreads make for a better first option.