What is this?
For every underlying asset, there are always two prices given. The currency pair EUR/USD can be seen on the trading platform in the following form:
Please be aware that all examples and graphics are for illustration purposes only and should not be considered as trading advice.
The first price of $1.08590 is the so-called bid price. At this price, you are selling the EUR/USD.
The second price of $1.08603 is the so-called ask price. At this price, you are buying the EUR/USD.
The difference of $0.00013 which in the financial world is referred to as the spread.
This amount can be seen as a fee as:
- for a position in which you predict the prices will rise, you must first purchase at the ask price and then sell at the bid price.
- for a position in which you predict the prices will fall, you must first sell at the bid price and then buy at the ask price.
Please note the two different prices when opening your position, as positions on rising prices are always opened using the ask price, positions on falling prices are always opened using the bid price.
How does the spread change?
The size of the spread is dependent on the current liquidity and volatility of the market.
Describes how often the underlying asset is being traded in terms of number and volume. A low level of liquidity is commonly seen during the first hours of a trading day, as many market participants are not yet awake, or the main stock markets are closed.
Describes the amount of movement happening in the market and the likelihood of price gaps. A price gap occurs when the price of an underlying asset does not rise or fall continuously, but rather jumps from price to price. This usually happens following unexpected or unpredictable global events.
Low liquidity and high volatility lead to higher spreads.