facebook tracking pixelWhat is a bid offer spread? | Cushon
Cushon Logo

What is a bid offer spread?

A bid/offer spread means that new investments pay a slightly higher price for units. This indirectly contributes to the trading costs incurred by the fund when investing the new money. It is used to protect the majority of investors from the costs of trading by a minority.

Without a bid/offer spread, these trading costs would be paid by the fund, which would disadvantage existing investors (as they are effectively paying someone else's trading costs).

For example, if a new investment of £10,000 created £20 of trading costs for the fund, the unit price might be set 0.2% higher, meaning the value of units purchased was only £9,980 (with the remaining £20 used by the fund to cover its cost).

Not all funds apply bid/offer spreads and some funds often make no adjustment on the basis that investors' overall trading costs are generally similar, so sharing them between everyone is fair overall.

The amount also varies depending on the type of assets the fund invests in. For example, it will usually be higher for funds that invest in assets that are harder (and hence more expensive) to trade, such as small companies or property.

When funds do apply a bid/offer spread it is typically between 0% and 2% of the unit price, but can occasionally be higher.

An alternative approach used by some funds is to apply a "dilution levy".