Spread is a common term in the financial market, usually referring to the difference between the Bid Price and the Ask Price. It is one of the costs that traders need to consider when opening a buy or sell position. The unit of spread is usually called ‘pip’, especially in foreign exchange trading.
For example, if the buying price of a currency pair is 1.1000 and the selling price is 1.1005, the spread is 5 points.
The size of a spread depends on several factors:
Market liquidity：the higher the liquidity, the smaller the spread. For example, major currency pairs like EUR/USD usually have lower spreads due to their high trading volume and liquidity. Less liquid assets, such as minor currency pairs or certain commodities, will have wider spreads.
Market volatility：when the market is volatile (such as when major economic data is released), spreads may widen as trading uncertainty increases and market makers may adjust their quotes to reduce risk.
Trading instruments：spreads are usually different for different asset classes such as Forex, Stocks, Commodities, etc. For example, major currency pairs in the Forex market usually have smaller spreads, while certain individual stocks or commodities in the stock market may have wider spreads.
Broker's pricing strategy：different brokers offer different spreads. Some brokers have fixed spreads, while others offer floating spreads, which fluctuate as market conditions change.
Trading hours：spreads are usually smaller during active market hours (e.g. during the opening of major financial centres) and may become wider during periods of non-trading hours (e.g. at night or on weekends).
Spreads are part of the transaction costs in Forex and other financial markets and therefore have a direct impact on a trader's profitability.
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