You've heard of the closing price for a security. It's a relatively simple concept: it's the price of a security when trading finishes for the day.
A settlement price is a little more complex. Rather than just the specific price at the relatively arbitrary moment that marks the end of the trading day, the settlement price is based on the average price of a contract over the course of the session.
The concept gets used in derivatives trading (things like futures and options). The settlement price plays into calculations of profit and loss, as well as other market considerations (figuring out margin requirements, price limits for the following day, etc.).
Think of a basketball game (or any team sporting event, really). Usually, the winner is determined by the team that has the highest score at the end of a game. So...one team trails another throughout the game, but in the last few seconds, comes back and takes the lead for the first time with the final shot. The comeback kids are the winners. That's how a closing price works.
Now imagine that the winner isn't decided by the final score, but by the average score differential throughout the game. The teams have a "settlement score" at the end, instead of a closing score. Then the team that led the whole game could still come out winners in the end, even though they fell behind in just the last few seconds.
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Finance: What is Spread?48 Views
finance a la shmoop. what is spread? before we start just no. get your mind
out of the gutter. spread refers to the money value between [100 dollar bill]
a bid and ask price under a market maker structure of trading securities. no more
wire hangers, a plastic hanger company is publicly traded on an exchange like
Nasdaq where buyers bid for a price to purchase and sellers ask for a price to [Nasdaq wall shown]
trade. no more wire hangers is bid this moment at 37:23 a share by buyers
willing to buy right now at that price and is being asked at this moment at a
price of 37.31. note the eight cents a shared difference in the share prices.
that dif is the spread between the two prices, and it's worth noting that in [bread is buttered]
extremely volatile stocks, the spread widens. and in boring highly liquid
stocks which don't move much, the spread tightens or is narrower. that is on a
volatile equivalent of no more wire hangers the spread might grow to 20 or
30 cents a share whereas a boring name that pays a big dividend and the stock
never moves much we're thinking AT&T here, [man snores at a desk]
well that spread might be just three or four cents. so why grow? well because a
market maker in a volatile stock doesn't want to be caught losing money on her
inventory. if no more wire hangers suddenly gapped down to 37.10 a share [equation shown]
well it would be likely less than the average of what the market maker paid
for her quote "inventory" unquote in that stock from which he was making a market
in it. each time the shares trade the market makers dip into that spread to [woman dips cracker in butter]
pay their bills and allow them to keep doing business. so that's spread. and it's
not the type that Prince used to sing about. [man on stage]
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