How do you find the spread in forex trading?
Forex brokers will quote you two different prices for a currency pair: the bid and ask price.
The “bid” is the price at which you can SELL the base currency.
The “ask” is the price at which you can BUY the base currency.
The spread is the difference between the bid and the ask prices.
Also known as the “bid/ask spread“.
The spread is how “no commission” brokers make their money.
This spread is the fee for providing transaction immediacy. This is why the terms “transaction cost” and “bid-ask spread” are used interchangeably.
Instead of charging a separate fee for making a trade, the cost is built into the buy and sell price of the currency pair you want to trade.
From a business standpoint, this makes sense. The broker provides a service and has to make money somehow.
- They make money by selling the currency to you for more than they paid to buy it.
- And they also make money by buying the currency from you for less than they will receive when they sell it.
- This difference is called the spread.
It’s just like if you were trying to sell your old iPhone to a store that buys used iPhones. (A smartphone with only two rear cameras? Yuck!)
In order to make a profit, it will need to buy your iPhone at a price lower than the price it’ll sell it for.
If it can sell the iPhone for $500, then if it wants to make any money, the most it can buy from you is $499.
That difference of $1 is the spread.
So when a broker claims “zero commissions” or “no commission”, it’s misleading because while there is no separate commission fee, you still pay a commission.
It’s just built into the bid/ask spread!