Length : 1.30 Minutes
What is a ‘spread’?
A spread is simply defined as the price difference between buy and sell price of any currency pair.
To put it differently, the broker will quote two different prices for every currency pair that they offer, a price to buy at (the bid price) and a price to sell at (the ask price).
The bid price is the highest price the broker will pay to purchase the instrument and the ask price is the lowest price the broker will pay to sell the instrument.
The ask price is greater than the bid price and the difference between ask and bid price (or ‘spread’) is the broker’s profit.
On the EUR/USD quote above, the bid price at the given time is 1.13359 and the ask price is 1.13360. Therefore, the spread is calculated by;
1.13360-1.13359=0.00001 (Spread equals one-tenth of a pip, which is called a pipette)
It is important to know that spreads are variable and they change time to time according to the market conditions, volatility and available liquidity.
However, some brokers may offer fixed spread accounts by charging commissions on each trades.