What Is Spread in Trading

What Is Spread in Simple Words?

Imagine that the bid price of Ethereum is $2,000, and the ask price is $2,010. In this case, the spread will be $10. This means that if you want to buy Ethereum, you will have to pay $2,010, and if you want to sell it, you will only be paid $2,000.  

It is important to realize that the spread exists because exchanges and brokers make money on the difference between the two prices.  

Spread in Trading

Traders can buy cryptocurrency either directly on an exchange or through brokers. All of these platforms have a spread, but its mechanism is slightly different.  

Let’s first consider what a spread on an exchange is. This indicator is formed based on the difference between the maximum purchase price and the minimum sale price in the exchange’s order book. Brokers can set their spreads and add them to their prices.  

In addition, on exchanges, the spread is most often transparent and is displayed directly in the order book. Brokers may have a hidden spread, and their clients can only see the final quotes.  

Trade participants often use the spread to estimate the value of trades. A narrow spread usually indicates a more liquid market, and a wide spread indicates a less liquid market, which can cause problems in executing trades.

What are spreads in Forex?  

Forex is one of the markets where traders can trade currencies, including digital currencies. The Forex spread has the same meaning as the standard spread. On average, in a calm market, this indicator is within 2-5 pips.  

Types of Spreads  

There are two main types of spreads:  

• Fixed — a spread that remains unchanged for a certain time, even if market conditions change;  
• Floating — a price difference that changes under the influence of market factors.  

Factors Affecting Spread Value  

Having understood what a spread is, let’s talk about the factors that determine its value:   

1. Trading volume of a certain asset: the higher the indicator, the smaller the difference between prices will be. 
2. Volatility: due to market instability, a sharp imbalance between buy and sell orders may appear, which expands spreads. 
3. Internal policy: brokers have the right to increase their markup, for example, to decrease the load on servers, or reduce it to attract more users.  
4. Time of day: spreads may be wider at night due to lower trading volume.  

Spread Rebate 

Is it possible to rebate the spread, what is a rebate, and how to get it? Today, many brokers offer their clients reimbursement of a part of the spread as a reward for trading. The money is returned as a fixed amount or as a percentage of the broker’s total commission. 

Conclusion  

The prices of buying and selling assets at the same moment in time are always different. The difference between them is called the spread. What is spread in simple words? It is the main way for brokers and exchanges to make money on users’ transactions. The spread value depends on market volatility, asset liquidity, time of day, and other factors. The price difference can be floating or fixed. To attract clients, many brokers offer an opportunity to return a part of the spread.  

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