Spread
The spread is the difference between the bid price (the price at which you can sell) and the ask price (the price at which you can buy) of a financial instrument, and it represents the baseline cost of entering any trade.
Quick Definition
The spread is the gap between the buying price and the selling price of a currency pair or CFD. It is measured in pips and is effectively the broker's built-in transaction fee. The narrower the spread, the lower your immediate cost of entry on each trade.
Detailed Explanation
When you open a trading platform and look at a quote for EUR/USD, you will rarely see a single price. Instead, you see two prices side by side — for example, 1.08502 / 1.08515. The first number is the bid, the price at which the market (or your broker) is willing to buy from you. The second number is the ask (also called the offer), the price at which the market is willing to sell to you. The difference between these two figures — in this case 1.3 pips — is the spread.
Spreads exist because liquidity providers, market makers, and brokers need compensation for facilitating trades and absorbing risk. In highly liquid markets like EUR/USD or USD/JPY, competition among providers keeps spreads tight, often between 0.1 and 1.5 pips during peak trading hours. In less liquid pairs — such as exotic currencies like USD/TRY or USD/ZAR — spreads can widen to 10, 20, or even 50 pips, reflecting the increased difficulty of matching buyers and sellers.
Spreads are not fixed. They are dynamic under most market conditions. During major news events — such as a US Non-Farm Payrolls release, a central bank interest rate decision, or a geopolitical shock — liquidity can vanish temporarily, causing spreads to widen sharply and unpredictably. A EUR/USD spread that sits at 0.8 pips on a quiet Tuesday morning might spike to 5 or 6 pips in the seconds before and after a Federal Reserve announcement. Traders who execute market orders at those moments absorb that wider cost automatically.
There are two main spread models offered by retail brokers. The first is a fixed spread, where the bid-ask gap remains constant regardless of market conditions — a feature often provided by market-maker brokers. The second is a variable (floating) spread, which fluctuates with real-time liquidity conditions and is common among ECN (Electronic Communication Network) and STP (Straight Through Processing) brokers. Some ECN brokers charge a near-zero variable spread but add a separate commission per lot, which functions economically in the same way as a wider spread.
Understanding that spread is a round-trip cost is essential. You do not pay the spread when you close a trade — you pay it the moment you open it, because you instantly start at a small loss equal to the spread. To break even, the market must move in your favour by at least the spread amount before you have covered your costs.
Real-World Example
Suppose EUR/USD is quoted at 1.08502 / 1.08515.
- The spread = 1.08515 − 1.08502 = 0.00013, or 1.3 pips.
- You decide to buy 1 standard lot (100,000 units of EUR).
- In EUR/USD, 1 pip = $10 on a standard lot.
- Your immediate spread cost = 1.3 pips × $10 = $13.00.
This $13 is deducted the instant your order fills. If you close the trade immediately at the same quote, you would receive the bid price of 1.08502 while you bought at the ask of 1.08515 — a loss of exactly $13, before any price movement.
Now consider an exotic pair, USD/ZAR, with a spread of 200 pips. On a standard lot where 1 pip ≈ $0.85, your entry cost alone is approximately $170. This illustrates why exotic pairs demand a much larger favourable move just to reach profitability.
Why It Matters for Traders
The spread directly affects your break-even point on every trade. Scalpers and day traders who open dozens of positions daily are particularly sensitive to spread sizes, because small differences compound into significant total costs over time. A trader executing 50 standard-lot trades per month on EUR/USD at a 1.2-pip spread pays roughly $600 per month in spread costs alone — before any commissions.
For longer-term swing traders or position traders, the spread matters less as a percentage of the total trade move, but it still contributes to the overall cost of the trading strategy. Understanding the spread also helps traders interpret why a stop-loss placed just beyond a key level may be triggered: the ask/bid gap means the market does not need to move as far as the chart suggests to hit your stop on a short position.
Common Misconceptions
Misconception 1: "The spread is the broker's profit." While market-maker brokers may retain part of the spread as revenue, ECN brokers pass the spread on to liquidity providers and charge a separate commission instead. The spread reflects the cost of liquidity, not necessarily pure broker profit.
Misconception 2: "A lower spread is always better." A broker offering a 0.0-pip spread with a $7-per-lot commission may be cheaper or more expensive than one offering a 1.2-pip spread with no commission, depending on your lot size and trading frequency. Always calculate the total all-in cost before comparing brokers.
Misconception 3: "Spreads only apply to forex." Spreads apply to virtually every tradable instrument: indices, commodities, stocks, and cryptocurrencies all have bid-ask spreads. A gold (XAU/USD) spread of $0.30 per ounce on a 100-oz contract, for instance, represents a $30 entry cost per trade.
Related Terms
- pip — The standard unit used to measure spread size
- lot-size — Determines the monetary value of each pip, and therefore the dollar cost of the spread
- leverage — Amplifies both potential gains and the relative impact of spread costs
- margin — The collateral required to open a position; spread costs are separate from margin requirements
How XM Compares
According to XM's officially published trading conditions, the broker offers floating spreads on its Standard Account starting from approximately 1 pip on major pairs such as EUR/USD, while its Zero Account is marketed with spreads starting from 0 pips with a commission of $3.50 per side per standard lot. XM states that spreads are sourced from multiple tier-1 liquidity providers and may widen during low-liquidity periods or major news events. Traders can verify current live spread conditions directly on XM's official website at xm.com, as values change in real time and published minimums do not represent guaranteed execution prices.
⚠️ Disclaimer: This glossary entry is provided for educational purposes only. Forex and CFD trading involves a high level of risk and may not be suitable for all investors. The information presented here does not constitute investment advice, a trading recommendation, or a solicitation to buy or sell any financial instrument. Spread values, trading conditions, and broker terms change frequently — always verify current figures directly on the broker's official website before opening any position.
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