What Is A Spread?

In currency trading there is much mentioned about the spread.  The spread is the difference in price between offered by a market maker for a real-time sale price and a real-time buy price. More commonly called bid (sale) and ask (buy) price quotes, the amount between them, the spread, always exists.  In stocks and bonds these amounts can be more significant.  In currency trading they are typically much smaller, but have more importance: they pay the broker’s fee, not the investor.  In currency trading so call market makers exist and are paid off the bid offer spread.  Market makers are simply brokers who both offer the sale and purchase of the same currency or stock.  In currency trading the bid offer spread while often only portions, even hundredths of a cent, add up.  It’s enough to keep these market makers in business and they in turn facilitate the quick transfer of currency from seller to buyer.

Spreads And Liquidity

Bid offer spreads offer market liquidity to stocks and currencies alike.  If you consider the bid one half of a bridge and the ask the other half, the bid offer spread would be the space between.  What market makers do is join these two halves where they meet at a slight difference.   Use this currency spread example to understand the role more clearly of the bid offer spread:

Using the US Dollar and Euro as base and quote currencies respectively, the US Dollar is valued at .891 Euros, represented in the currency market as USD/EUR .891 for the best bid price.  The best ask price USD/EUR .895

In this example you can purchase Euros for .891 of one US Dollar, and sell them for .895 to the US Dollar.  The amount of difference per unit is .004 Euros and is the spread.

Related posts:

1. What Is A Market Maker?
2. What Is An Offer?
3. What Is An Ask Rate?
4. What Is A Transaction Cost?
5. What Is A Currency Converter?