Skip to main content

Search

Support Center

What Is the Spread and How Is It Calculated?

Evest Support
  • Updated

The spread is the difference between the Ask Price (buy price) and the Bid Price (sell price) of a financial instrument, such as currencies, stocks, or CFDs. It is one of the most common indirect trading costs, representing the gap between the buying and selling prices. The spread reflects factors such as market liquidity, volatility, and order execution conditions, all of which affect the overall cost of executing a trade.

On trading platforms, the Ask Price is always higher than the Bid Price. This means the market must move in your favor by at least the size of the spread before your position becomes profitable.

Types of Spread

Fixed Spread

A Fixed Spread remains unchanged regardless of market conditions or volatility. The difference between the Ask and Bid prices stays constant most of the time.

Calculation:

Spread = Ask Price − Bid Price


 

Example:

  • Ask Price = 1.2050
  • Bid Price = 1.2048

Spread = 0.0002 (2 pips)

Advantages:

  • Predictable trading costs
  • Suitable for beginner traders

Disadvantages:

  • Usually higher than variable spreads

Variable Spread

A Variable Spread changes according to market conditions, including liquidity and volatility. It typically narrows during normal market conditions and widens during major news releases or periods of high volatility.

Calculation:

Spread = Ask Price − Bid Price


 

The formula remains the same, but the difference fluctuates continuously.

Advantages:

  • Lower trading costs under normal market conditions
  • Preferred by active traders

Disadvantages:

  • Can widen significantly during volatile market events

Spread in Pips

The spread is commonly measured in pips, which represent the smallest standard price movement in most currency pairs.

Calculation:

Spread (Pips) = (Ask Price − Bid Price) ÷ Pip Value


 

Example:

If the difference between the Ask and Bid prices for EUR/USD is 0.0003, then:

Spread = 3 pips

Spread Cost

The Spread Cost is the actual cost a trader pays when opening a position.

Calculation:

Spread Cost = Spread × Lot Size


 

Example:

  • Spread = 2 pips
  • Position Size = 1 Standard Lot (100,000 units)

Estimated Cost = Approximately $20 (depending on the currency pair and pip value).

Key Points to Remember

  • A lower spread generally means lower trading costs.
  • The spread is influenced by market liquidity, account type, and the broker's pricing model.
  • Major currency pairs typically have lower spreads than exotic currency pairs because they are more liquid.

Risk Warning: Trading involves a high level of risk and may result in the loss of all your invested capital. Always ensure you understand all trading costs, including spreads, before making any investment decisions.


 

Contact us