Glossary > Finance > Financial Markets > Forex Markets

Spread

Spread in finance refers to the difference between the price at which you can buy an asset and the price at which you can sell that asset. It represents a cost to the investor and a profit to the broker or market maker.

Example #1

Imagine you want to buy a stock, and the asking price is $10, but if you were to sell it immediately, the bid price is $9. The spread in this case is $1 ($10 - $9).

Example #2

In the context of Forex trading, if the exchange rate for USD to EUR is 1.1200 when buying and 1.1190 when selling, the spread is 0.0010.

Misuse

Misuse of spreads can occur when brokers or market makers widen the spread excessively to generate more profit for themselves at the expense of investors. This can lead to higher transaction costs for consumers, eroding potential gains.

Benefits

A tight spread can benefit consumers by providing better pricing and lower transaction costs. It ensures that investors can enter and exit trades with minimal impact on their profits.

Conclusion

Understanding spreads is crucial for consumers to make informed investment decisions and avoid unnecessary costs. By promoting transparency in pricing and discouraging excessive spreads, consumers can benefit from fair and efficient markets.