Spread
Family IV · Costs
Not to be confused with commission, forex spread, good spread, spread betting forex.
Spread is the gap between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). It is the primary cost of entering and exiting a position in most markets, including forex, stocks, and commodities. The spread is typically measured in pips or points and can vary based on liquidity, volatility, and market conditions.
How the spread works
The spread is the difference between the ask price (the price at which you can buy) and the bid price (the price at which you can sell). When you open a trade, you immediately face the spread as a cost: you buy at the ask and sell at the bid. For example, if a currency pair is quoted with a bid of 1.2000 and an ask of 1.2002, the spread is 2 pips. The spread compensates market makers or brokers for providing liquidity and facilitating the trade.
Worked example
Factors affecting the spread
Spreads are not fixed and can widen or narrow depending on several factors:
- Liquidity: Major currency pairs like EUR/USD typically have tighter spreads than exotic pairs.
- Volatility: During news releases or market opens, spreads often widen due to increased uncertainty.
- Broker model: Some brokers use a fixed spread, while others use a variable spread that reflects market conditions.
- Time of day: Spreads tend to be tighter during peak trading sessions (e.g., London–New York overlap).
Understanding these factors helps traders anticipate transaction costs.
Often confused with
- commission
- A commission is a separate fee charged per trade, often in addition to the spread, whereas the spread is the difference between bid and ask prices; the visible sign is whether the cost is embedded in the price quote or listed as a separate line item.
- forex spread
- A forex spread is specifically the spread in the foreign exchange market, while the general term spread applies to any financial instrument; the visible sign is the market context in which the term is used.
- good spread
- A good spread refers to a narrow spread that is favourable for trading, whereas the spread itself is simply the difference between bid and ask; the visible sign is the qualitative judgement implied by the word 'good'.
- spread betting forex
- Spread betting forex is a derivative product where you bet on price movements without owning the underlying asset, and the spread is the cost of placing the bet, while the spread alone is just the price difference; the visible sign is the presence of betting mechanics and tax treatment.