The term “spread” is fundamental in trading and refers to the difference between the bid price and the ask price of an asset. Understanding the spread is crucial for traders because it directly affects trading costs and potential profitability.

In any financial market—be it stocks, forex, indices, or CFDs—two key prices exist for each asset: the bid price and the ask price. The bid price is the highest price a buyer is willing to pay for the asset, while the ask price (sometimes called the offer price) is the lowest price a seller is willing to accept. The spread is the numerical difference between these two prices.

Formula: Spread = Ask Price – Bid Price

For example, suppose the bid price of a currency pair like EUR/USD is 1.1050 and the ask price is 1.1052. The spread in this case is 0.0002, or 2 pips (a pip is the smallest price move in forex trading). This means that as soon as you enter a trade, you start at a slight loss equal to the spread, because you buy at the ask price and would have to sell at the bid price.

Spreads can be expressed in absolute terms (like a price difference) or in relative terms (as a percentage of the asset’s price). Traders often consider the spread as a hidden cost of trading, since it represents the amount they need the market to move in their favor before they can start making a profit.

In real-life trading, spreads vary depending on the asset, market conditions, and the broker’s pricing model. For instance, in the forex market, major currency pairs like EUR/USD or USD/JPY typically have very tight spreads, often just one or two pips during active trading hours. On the other hand, exotic currency pairs or less liquid stocks might have wider spreads. Consider an index CFD on the S&P 500 where the bid price is 4200.50 and the ask price is 4201.00; the spread here is 0.50 points. If you enter a position, you effectively pay this spread upfront.

One common misconception about spreads is that they are fixed and constant. In reality, spreads fluctuate throughout the trading day, affected by factors like market volatility, liquidity, and news events. During high volatility periods or outside regular market hours, spreads tend to widen. For example, a trader might notice a spread of 1 pip during peak hours but see it jump to 5 or more pips during news releases or after hours.

Another frequent error is ignoring the impact of spreads when calculating trade profitability. Some traders look only at price movement and forget that the spread represents an immediate cost. If you buy a stock with a spread of $0.05, the price must rise by at least $0.05 before you break even. This is why scalpers, who aim for small profits from quick trades, pay close attention to spreads—they need very tight spreads to make their strategies viable.

People often search queries such as “what is spread in trading,” “how does spread affect trading,” “spread vs commission,” and “why do spreads widen.” It’s worth noting that spreads differ from commissions or fees. While commissions are explicit charges by the broker, spreads are implicit costs built into the bid-ask prices. Some brokers offer commission-free trading but compensate by widening the spreads.

In summary, the spread is a key concept that influences trading costs and strategy. It’s the difference between what buyers are willing to pay and sellers want to receive, fluctuating with market conditions. Successful traders keep an eye on spreads, especially when trading assets with low liquidity or during volatile times, to ensure they manage costs effectively.