Spreads offered in CFDs is one of the major consideration, besides credibility, while choosing a CFD provider. Spread in CFDs is basically an indirect cost that you pay for trading.
Spreads are reflected in the two prices —one higher and one lower — that you get when you request a quote for CFDs. The higher price or the Offer is the price at which the CFD provider is ready to sell CFDs to you. The lower price or the Bid is the price at which it will buy CFDs.
Spreads in CFDs should be viewed as a measure of transaction cost and the liquidity of the relevant market. When you want to initiate a trade in CFDs you are actually demanding liquidity. The counterparty, a market maker or CFD provider supplies liquidity. When the transaction is completed, you as a demander of liquidity pay the spread while the other party earns the spread. Along with brokerage fees, the bid/offer spread comprises the total cost of trading in CFDs.
This is how you pay the transaction inasmuch as it relates to spreads. Suppose the bid/offer price that you get is 5/6 AUD and you open a position by buying CFDs at 6 dollars. Let us assume that the price does not change during the course of the day and also that you are constrained to close the position by the end of the trading session. You will have to close it at 5 dollars and the transaction (open and close) has cost you 1 dollar multiplied by lot size. If you want to make a profit, you will have to wait for the price to cross 6 dollars.
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