What Is the Forex Spread?
When you invest in forex, you must constantly be aware of the forex spread. Without the spread and without knowledge of it a trader would not be able to make profits on his or her trades. This spread is what brokers use to determine the rates at which they pay for forex trades.
The forex spread is essentially the difference between the bidding price and the asking price of a currency on the foreign currency market. It is expressed in terms of pips. Each pip represents 1/100th of a percentage point. These pips are incredibly small but they become more significant when you deal in very large amounts of currency.
Brokers and traders in the forex market express currency values with four places after the decimal. As an example, they might say that one euro is equal to USD 1.2935. If that value changes during the course of the trading day to USD 1.2945, then they will say that the value has increased ten pips. Brokers use pips to determine how to sell a currency to a trader or buy one from him or her. These pips determine the broker’s profit.
How Is the Forex Spread Used?
Forex brokers use the spread to make money on the trades that are placed through them. When you go to a broker to make a forex trade, the broker may state that he or she is paying 1.2550 for any trade in a given currency. In this case, the broker will then sell you this currency at a rate of 1.2549. When you return to sell the currency through the broker, you will pay one pip over the spread. Thus, you always pay the forex spread once you have both bought and sold a particular currency.
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