The spread is the price of immediacy. At any moment there is a best bid (what buyers offer) and a best ask (what sellers want). If you buy at market, you pay the ask; if you sell at market, you receive the bid. The difference is a cost you pay on every round trip, before any commission.
How it works
- Quoting. In forex, spreads are quoted in pips; in stocks, in cents; in crypto, in quote currency or as a percentage.
- Liquidity. Highly traded instruments, such as major forex pairs or large-cap stocks, usually have tight spreads. Small caps, exotic pairs and minor tokens can have wide ones.
- Conditions. Spreads widen during news, at session opens and closes, and when volatility jumps.
- Fixed vs variable. Some brokers offer fixed spreads; most are variable and follow market conditions.
Using a market order means crossing the spread; a limit order placed on the bid or ask can avoid crossing it, at the risk of not filling. Spread costs combine with slippage and commissions to form the total cost of trading.
Example
A currency pair is quoted 1.2650 / 1.2652, a 2-pip spread. A trader buys 1 standard lot (100,000 units), where 1 pip is worth about $10. The position is immediately down 2 pips, about $20. If the trader’s take-profit is 20 pips away, the spread eats 10% of the expected gain.
A stock quoted $12.40 / $12.46 has a 6-cent spread, about 0.5% of the price. A trader making a quick 1% trade gives up roughly half of it to the spread alone.
Common mistakes
- Ignoring the spread on short-term trades. The smaller the target, the larger the spread’s share of it.
- Trading at the rollover or open. Spreads can be several times wider than normal.
- Setting stops without the spread. A short position’s stop is triggered by the ask, not the bid shown on many charts.
- Comparing brokers on commission only. A low commission with wide spreads can cost more.
Estimate pip values with the pip calculator.
Educational content — not financial advice.
Updated