What is spread in trading?

What is spread in trading?

Spread in trading is one of the main

Investment activity obliges to understand the meaning of some terms. Spread is one of the main ones. So brokers call the difference between the best price at the time of purchase and at the time of sale of the asset. If we take into account that it is on fluctuations in exchange rates that specialists on exchanges earn their capital, knowledge of the spread in trading is important for every market player.

Spread in trading: what, how and why

The spread is somewhat similar to the profit from the profitable resale of the goods. When you, for example, bought a thing cheaper and sold it more. In trading, this difference is called spread, and brokers receive income from operations.

In the currency market, this term is used to understand the liquidity of trading. It is known that the higher the difference between buying and selling currency, the lower the liquidity of the market. But it is not so easy to sell an asset profitably. Here again you can remember the story of clothing, when the desire to lower the goods at too high a price can not be realized.

The spread in currency trading can be explained by the example of EUR\USD pair at 1.2668/1.2672. The difference in the value of these currencies shows that the spread for one lot is 4 points, which in monetary terms is $ 40.

Opening an order for 4 lots, your loss will be $ 160. To compensate it, you need to change the quotes of the currency pair in your favor by the same 4 points. Subsequent progress will provide you with a net income.

What affects the size of the spread

There are three factors that reflect the spread:

Liquidity of the currency pair. As a rule, in the most popular of them, the size of the spread does not rise above 5 points. At the same time, when trading rare or not the most used currencies, there is a spread of up to 50 points and above

Market situation. It is shaped by political and economic sentiment in all corners of the world. Thus, any news, for example, from the USA Congress can change the exchange rate, which will lead to an increase or decrease in the spread.
Affiliate program. Thanks to them, the participants receive a bonus at the expense of the spread. By the way, the rapid growth of such programs in this market segment contributes to the increase in the amount of the fee, which is an inevitable “headache” for any trader.