When you start trading forex, stocks, or CFDs, you’ll quickly come across the term “spread.” Understanding spreads is crucial because they directly affect your trading costs and potential profits.
This guide explains what spreads are, how they work, the types of spreads, and how traders can minimize their costs.
1. What Is a Spread?
A spread is the difference between the buy (ask) price and the sell (bid) price of a financial instrument.
- Bid Price: The price at which you can sell an asset
- Ask Price: The price at which you can buy an asset
Example:
If EUR/USD has a bid price of 1.1200 and an ask price of 1.1202, the spread is 0.0002 or 2 pips.
Spreads represent the broker’s fee for facilitating the trade—so even if you make no market movement, you start with a small cost.
2. Why Spreads Matter
Spreads affect your trading costs and profitability:
- Narrow Spreads: Lower trading costs, better for frequent traders
- Wide Spreads: Higher costs, often seen during volatile markets or with less liquid assets
Tip: Always compare spreads across brokers before trading, especially if you plan to trade frequently.
3. Types of Spreads
a. Fixed Spreads
- Remain constant regardless of market conditions
- Good for beginners who want predictable costs
- May be slightly higher than variable spreads in normal market conditions
b. Variable (Floating) Spreads
- Change depending on market liquidity and volatility
- Can be very low during stable periods
- May widen significantly during high volatility or news events
4. Spreads vs Commissions
Some brokers offer “spread-only” accounts, while others charge spreads plus commissions.
- Spread-Only: The broker earns via the difference between bid and ask prices
- Spread + Commission: You pay a small commission per trade, often paired with very tight spreads
Tip: Check your broker’s fee structure carefully to understand the true cost of trading.
5. How to Calculate the Cost of Spreads
Example:
- Currency pair: EUR/USD
- Trade size: 1 lot (100,000 units)
- Spread: 2 pips
Calculation:
2 pips × $10 per pip = $20 cost per trade
This cost is deducted from your potential profits immediately after opening the trade.
6. Tips for Minimizing Spread Costs
- Trade during peak market hours when liquidity is high
- Choose brokers with tight spreads
- Avoid trading highly volatile instruments during news releases
- Consider variable spreads if you can handle occasional widening
Conclusion
Understanding spreads is essential for all traders. They represent your initial trading cost, affect profitability, and vary depending on the broker and market conditions. Knowing how to calculate and minimize spreads can save you money and improve trading performance.
Start trading smarter—choose brokers with competitive spreads and read verified reviews on Broker Reviewers to protect your funds and maximize profits!
Frequently Asked Questions (FAQs)
A pip is the smallest price movement in a currency pair, usually the fourth decimal place (0.0001) for most forex pairs.
It depends. Fixed spreads are predictable, while variable spreads can be lower in stable markets but widen during volatility.
Yes, spreads exist for forex, CFDs, commodities, and indices. The size varies by asset and broker.
Variable spreads can widen during low liquidity periods or high volatility events.
Trade during high liquidity hours, choose brokers with tight spreads, and avoid trading during major news events.
