Spread

What the spread means

The spread is the difference between the price at which you can buy an instrument and the price at which you can sell it at the same moment. The higher price is the ask, also called the offer, and the lower price is the bid. If a currency pair is quoted 1.1000 bid and 1.1002 ask, the spread is 0.0002, which traders call two pips.

For most retail traders, the spread is the main trading cost. You buy at the ask and sell at the bid, so a position starts slightly in the red: the market must move by the amount of the spread before you break even. Unlike a commission, the spread is built into the price and you do not see a separate line for it on a statement.

Spreads exist in every market, from shares and ETFs to futures, options and cryptocurrencies. They are quoted in different units: pips for currency pairs, points for indices, cents or percent for shares. Understanding how the spread is quoted is the first step in comparing the cost of two brokers.

How it works

The spread reflects the compensation that liquidity providers require for standing ready to buy and sell. A dealer who quotes both sides takes the risk that the price will move before the opposite trade can be found. The wider the risk, the wider the spread. Several factors drive it.

• Liquidity: heavily traded instruments, such as major currency pairs, have tight spreads, while exotic pairs and small-cap shares have wide ones.
• Volatility: spreads widen when prices move fast, around news announcements or at market opens.
• Time of day: the spread is often narrowest when major financial centres overlap and widest during rollover or thin overnight sessions.
• Account and execution model: a market maker usually offers a fixed or variable spread that includes its markup. An ECN or direct-market-access account typically passes through the raw spread from the market and adds a separate commission.
• Order size: large orders may be filled across several price levels, widening the effective cost.

Spreads can be fixed, which stay the same regardless of conditions, or variable, which change continuously. Fixed spreads give predictability but may be wider on average, and brokers can still suspend them in extreme markets. Variable spreads are usually tighter in quiet times and much wider in turbulent ones.

A worked example

These numbers are illustrative only. A trader compares two accounts for trading EUR/USD with a standard lot of 100,000 units. One pip on a standard lot is worth about 10 USD.

Account A is a standard account with a typical spread of 1.4 pips and no commission.

Account B is a raw-spread account with a typical spread of 0.2 pips and a commission of 3.50 USD per side per lot.

1. Cost on Account A for a round trip: spread 1.4 pips × 10 USD = 14 USD.
2. Cost on Account B: spread 0.2 pips × 10 USD = 2 USD, plus commission 3.50 × 2 sides = 7 USD, total 9 USD.
3. Account B costs 5 USD less per lot in this scenario, so a trader doing 20 lots a month would save about 100 USD.

Now consider news. Suppose that during a major data release Account A's spread jumps to 5 pips and Account B's to 3 pips. The costs would be 50 USD and 37 USD (30 + 7) respectively. Both rise sharply, which illustrates why spreads should be judged in quiet and volatile conditions, not only on average.

Why it matters

The spread is paid on every trade, so it adds up. A short-term trader making dozens of trades pays it again and again, and a spread that seems tiny can consume a major part of a small target. Investors who buy and hold pay it only twice, which makes it less decisive, though for illiquid products it can still be substantial.

Brokers differ in how they price spreads and what else they charge. A low advertised spread may come with a commission, a higher minimum deposit or slow execution. Conversely, a wider spread without commission can be cheaper for an occasional trader. The total cost, not the headline number, is what to compare.

How to use it in practice

1. Identify the instruments you trade and find the typical, not the minimum, spread for each.
2. Convert all costs to the same unit, such as pips or currency per lot, including any commission.
3. Check the spread at different times of day and during news on a demo account or the broker's published statistics.
4. Find out whether the spread is fixed or variable and what happens in extreme conditions.
5. Compare accounts, such as standard and raw-spread, using your expected trading volume.
6. Factor the spread into stop-loss and target placement so that you are not stopped out by it.
7. Review the real cost regularly using your trading statement.

Common mistakes and misconceptions

• Comparing the lowest advertised spread. Advertised figures are often best-case; the average and the peak matter more.
• Forgetting commission. A zero-commission account is not automatically cheaper.
• Ignoring widening. Spreads can rise at rollover, at the open and around news.
• Assuming a fixed spread is guaranteed. Conditions in the terms can allow changes.
• Judging only by pips. Pip values differ by pair and by lot size, so the same number of pips can cost different amounts.
• Thinking the spread is the only cost. Swaps, financing, currency conversion and inactivity fees can matter as well.

Risks and limitations

Spreads can widen sharply at the worst moment, such as during a gap or a thin market, which can trigger stop orders and margin calls. Leveraged products magnify the effect of costs relative to the account. Marketing that highlights tight spreads may omit conditions such as minimum deposit or trading hours. The spread is a snapshot and changes constantly, so a cost estimate is only as good as the data behind it.

How Brokeli looks at it

We record spread information as typical and conditional values in the published research snapshot, alongside commissions, financing and other fees, so costs can be compared on the same basis. We note whether a broker uses a market-making or a pass-through model, and we separate advertised minimums from measured or documented averages where the data allow it.