What the Spread Means
The spread is the gap between two prices quoted at the same moment: the bid (the price at which you can sell) and the ask (the price at which you can buy). Because the ask is almost always higher than the bid, every new position starts slightly "underwater" by the size of the spread. In forex, spreads are usually measured in pips; in stocks and ETFs, they are quoted in the currency of the instrument.
Spreads exist because market makers and liquidity providers need compensation for taking on risk and providing continuous two-way prices. In many forex and CFD accounts, the spread is the primary visible trading cost, sometimes alongside commissions or overnight financing.
Why It Matters
The spread directly affects your breakeven point. A trade only becomes profitable after the price moves far enough in your favor to cover the spread (plus any other fees). For long-term investors making occasional trades, spreads are usually a minor cost. For active traders — especially scalpers and day traders — spreads can be the single largest expense, because the cost is paid on every round trip.
Spreads are not fixed in all markets. They typically widen during periods of low liquidity, high volatility, or around major news releases, which can meaningfully change the economics of a strategy.
A Simple Example
Suppose a currency pair is quoted with a bid of 1.1000 and an ask of 1.1002. The spread is 0.0002, or 2 pips. If you buy at 1.1002, the position shows a small loss immediately, because you could only sell it back at 1.1000. The market must rise at least 2 pips before the trade reaches breakeven, before considering any other costs.
Common Mistakes
- Ignoring the spread entirely and judging a strategy only on price movement, which overstates realistic returns.
- Assuming spreads are constant. Quoted "typical" spreads often reflect calm market hours; real spreads can widen sharply overnight or during news events.
- Comparing platforms on spread alone while overlooking commissions, financing charges, or execution quality.
- Trading illiquid instruments where wide spreads quietly erode returns, even when the underlying idea is sound.
- Overtrading, which multiplies the number of times the spread is paid.
What to Verify Before Acting
Before relying on any quoted spread, check the live bid and ask prices on the instrument you actually plan to trade, at the time of day you plan to trade it. Confirm whether the account type uses variable or fixed spreads and whether commissions apply on top. A cost of trading calculator can help you estimate how spreads and other fees add up across your expected trade frequency, and independent broker reviews can provide context on typical pricing structures. Because spreads on CFD and forex products interact with leverage and financing costs, always verify the full fee schedule and current terms directly with your provider before opening positions — conditions change and vary by account type and region.