What is Spread in Trading?
A Complete Guide for New Traders
Understand what a spread in trading is, how bid and ask prices create it, why spreads change, and how spreads apply across forex, shares, ETFs, commodities and CFDs.
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A spread is the difference between the available buying price and selling price of a financial instrument.
It is commonly shown through two market prices: the bid price and the ask price. The bid is the available price for selling, while the ask is the available price for buying. The difference between these prices is called the spread.
Spreads appear across many financial markets, including forex, shares, exchange-traded funds, commodities, indices and Contracts for Difference (CFDs). The way a spread is displayed may vary by product and platform, but the underlying concept remains the same.
Understanding spreads is useful when reading market quotes, reviewing product information and recognizing how pricing can change during different market conditions.
What is Spread in Trading?
A spread is the difference between the bid price and ask price of an instrument at a particular moment.
For example, a platform may display the following quote:
| Instrument | Bid Price | Ask Price |
|---|---|---|
| EUR/USD | 1.08420 | 1.08435 |
In this example:
- 1.08420 is the bid price.
- 1.08435 is the ask price.
- 0.00015 is the difference between them.
That difference is the spread.
The bid price is normally lower than the ask price. This is a common feature of market quotations and may change throughout the day.
How to Calculate Spread?
The basic calculation is:
Ask Price − Bid Price = Spread
Using the EUR/USD example:
1.08435 − 1.08420 = 0.00015
For many forex pairs, the fourth decimal place is commonly used to express a pip.
In this example, the spread is commonly described as 1.5 pips.
The price format can differ between instruments. For example, shares and ETFs may show the spread as a monetary amount rather than in pips.
| Example Share | Bid Price | Ask Price | Spread |
|---|---|---|---|
| Example Co. | 50.20 | 50.25 | 0.05 |
Here, the spread is 0.05 in the quoted currency.
A Forex Spread Example
Forex prices are shown in currency pairs, such as EUR/USD, GBP/USD or USD/JPY.
Consider this quote:
GBP/USD
Bid: 1.2650
Ask: 1.2653
The calculation is:
1.2653 − 1.2650 = 0.0003
For many currency pairs quoted to four decimal places, this is commonly described as a three-pip spread.
Pairs that include the Japanese yen are often displayed with a different decimal format.
For example:
USD/JPY
Bid: 156.20
Ask: 156.23
The difference is 0.03, commonly described as three pips for this pair.
Always check the decimal format used by the platform before interpreting the size of a spread.
Spreads Across Different Markets
Spreads apply to many types of financial instruments.
Forex
In forex, the spread is the difference between the bid and ask prices of a currency pair.
It can vary according to the pair, trading session, liquidity conditions and provider pricing arrangements.
Shares
For listed shares, the bid can represent the highest available price from a buyer, while the ask can represent the lowest available price from a seller.
The difference between them is the bid-ask spread.
Exchange-Traded Funds
ETFs can also display bid and ask prices during exchange trading hours.
ETF spreads may be influenced by market activity in the ETF, the liquidity of its underlying holdings and the exchange where it is listed.
Commodities
Commodity-related instruments can show different bid and ask prices depending on their market structure, product type, trading venue and available liquidity.
Indices
Index-related products can show spreads based on the underlying market, pricing model, trading hours and platform conditions.
CFDs
A CFD is a derivative product linked to an underlying market, such as a currency pair, share, index or commodity. It does not provide ownership of the underlying asset.
CFD spreads, margin requirements, financing charges and trading hours can vary by product, provider and jurisdiction.
Why Spreads Change?
Spreads are not always the same. They can become narrower or wider as market conditions change.
Market Liquidity
Liquidity refers to how easily an instrument can be bought or sold without causing a significant change in price.
When there are more active price quotations available, bid and ask prices may be closer together. When fewer quotations are available, the difference between the bid and ask prices may be greater.
Market Activity
Activity can vary by instrument and time of day.
For example, a currency pair may have different quote conditions when major global financial centres are active compared with periods of reduced activity. Shares and ETFs may also have different conditions during and outside regular exchange hours.
Economic and Corporate Announcements
Economic releases, central-bank statements, company announcements and policy developments can affect market activity.
During these periods, available prices can change quickly and spreads may also change.
Public Holidays and Market Closures
Public holidays, shortened sessions, maintenance periods and exchange closures can affect available quotations.
Every market has its own trading calendar and product-specific schedule.
Instrument Type
Different instruments can have different pricing characteristics.
A widely traded currency pair may have a different spread structure from a less frequently quoted pair. Similarly, a large listed share may display different conditions from a smaller listed share or a specialized ETF.
Fixed and Variable Spreads
Some products may be described as having fixed spreads, while others may use variable spreads.
Fixed Spreads
A fixed spread is generally presented as a stated difference between the bid and ask price under specific product conditions.
The full terms, exceptions and circumstances in which pricing may differ should always be checked in the product documentation.
Variable Spreads
A variable spread can change according to liquidity, market activity, available pricing and other market conditions.
The way spreads are offered and displayed can differ by provider, account type, instrument and jurisdiction.
Spread Versus Other Charges
A spread is only one part of a product’s overall pricing structure.
Depending on the instrument and provider, other charges may apply, including:
- Commissions
- Financing charges
- Currency-conversion charges
- Exchange fees
- Custody charges
- Account-related fees
These charges can differ by product, account type, market and jurisdiction. Reviewing the complete pricing schedule is important rather than focusing only on the spread shown on a platform.
Common Misunderstandings About Spreads
A Spread Does Not Predict Market Direction
The spread shows the difference between the current bid and ask price. It does not indicate whether a market may move higher or lower.
A Narrow Spread Does Not Mean Conditions Will Remain the Same
Market conditions can change at any time. A narrow spread is only a point-in-time quotation.
A Spread Is Not the Only Pricing Consideration
Commissions, financing charges, exchange fees and other product-specific charges may also apply.
Quotes Can Differ Between Providers
Providers may use different price sources, execution arrangements, product specifications and pricing structures. This can result in differences between displayed quotes.
🔖 Summary
A spread is the difference between the bid price and ask price of a financial instrument.
It applies across forex, shares, ETFs, commodities, indices and derivative products. Spread size can change in response to liquidity, market activity, volatility, trading hours and major market events.
Understanding bid and ask prices, spread calculations and the wider pricing structure can make market quotations easier to interpret. It is also important to review product documents, trading conditions, charges and risk disclosures before taking any action.
Frequently Asked Questions
What is a spread in trading?
A spread is the difference between the available bid price and ask price of a financial instrument.
How is a spread calculated?
Subtract the bid price from the ask price.
Why is the ask price usually higher than the bid price?
The bid price is the available price for selling, while the ask price is the available price for buying. The difference is the spread.
Are spreads only used in forex?
No. Spreads can also apply to shares, ETFs, commodities, indices and derivative products.
Why can spreads become wider?
Spreads can change because of liquidity, market activity, volatility, trading hours, public holidays and major announcements.
Does the spread show future market direction?
No. It only shows the difference between the currently available bid and ask prices.
Is spread the only charge to review?
No. Depending on the product and provider, commissions, financing charges, exchange fees and other charges may apply.
Risk Warning
This content is for educational purposes only and does not constitute financial advice; trading involves significant risk, and you may lose your capital.
GTCFX operates as a multi-regulated group of companies, clients are kindly advised to confirm the specific legal entity, regulation, and jurisdiction under which they are being onboarded.