You’re tracking the share price of a company listed on the FTSE 100 on Google. The share price has been on an upward trajectory and is set to continue in its upward path. The share prices drops momentarily, but you’re confident it will resume its upward trajectory. You swiftly get your phone out to buy some shares. But there’s a problem. The share price shown by Google is not price shown by your trading app. Why?
This is the reality that confronts many people new to the world of buying and selling shares. As you continue your investment journey you’ll learn new things. New things such as what a ‘spread’ is.
One of the ways a trading platform makes money is via the spread. The spread is the price difference between what a share price really is worth and what the trading platform sells you the share for. Think of it as a shopkeeper buying a toy for £1 and selling it on for £4. The £3 price difference is the profit for the shop keeper. Trading platforms make profit in a similar fashion.
Is there always a spread involved when buying shares?
It depends on several factors. Quite often, platforms that charge a fixed-fee for transactions don’t use spreads. After all, they are making their money on every transaction. But the free platforms, like eToro ,often charge a spread. Larger platforms, like Hargreaves Lansdown, are able to charge all sorts of fees, such as management fees and dealing fees so may forego making a profit on the share itself.
If we’re okay accepting that the toy seller sells their toys for more than what they buy them for, we shouldn’t have a problem accepting trading platforms use spreads. This is one of the main ways many trading platforms are able to remain 'free' to use.
P.S If you enjoy learning about the stock market and want to learn how to trade on the stock market, consider signing up to the 30 Day Trading Programme. The programme is free and you can learn at your own pace.