What is Forex Spread?
The meaning that has the term spread in the Forex market is just the difference that exists, expressed in pips, between the bid price which refers to the purchase price, and the ask price that refers to the sale price for a pair of currency determined, as for example EUR/USD. Many Forex brokers use the Forex in order to obtain benefits from each transaction made by their clients (named traders) and this happens through their trading network in the market.
As it is mentioned before, the price for the quotation of any currency pair will be expressed through combining the symbols of both currencies that make up the pair and the bid and ask prices respectively as will be seen next:
The bid makes reference to the highest price that the market is in the willingness to buy, so this term can also be found as purchase price or demand price. Hence, we are talking about the price by which the trader will enter the market if the currency pair is for sale.
Now, the lowest price at which the market is in the willingness to sell is known as Ask and can also be found as sale or offer price. As consequence, we refer to the price by which the trader will enter the market if he is buying the currency pair.
Understood this, the spread is the existent difference between the Bid and the Ask price; this is expressed in points, but in the case of the Forex market, it comes expressed in pips. As an example for this, we have the previous case of the currency pair EUR/USD in which the spread is 2 points or pips.
In a few words and for a better comprehension of the reader, we can define spread as the cost of each of the transactions or operations made by the trader in the Forex market and all of this without taking into count the direct commissions that some brokers might charge. Depending on the broker that the trader is using, the cost of each transaction may vary, as a result of being variable costs; there is no measure that can be applicable to all companies.
Having this into count, we can affirm that the spreads are the money that intermediaries as the brokers charge for making the different operations the client requests in his name. All those people who have their own funds and handle them use the Forex market to make their investments because it allows them to gain profits thanks to the spread, as a payment method for the services they offer. The spreads form the profits that these people or even companies make by giving others the ways of negotiate in the currency market.