In trading, what does 'spread' refer to?

The term 'spread' in trading specifically refers to the difference between the bid price and the ask price of a security. The bid price is the maximum price that a buyer is willing to pay for a security, while the ask price is the minimum price that a seller is willing to accept for that security. This difference is fundamental to understanding market dynamics as it reflects the liquidity of the asset and the costs associated with trading it. A narrower spread generally indicates high liquidity and competitive pricing, whereas a wider spread may suggest lower liquidity and higher transaction costs. Understanding the spread is essential for traders as it directly impacts trading strategies and potential profits.