The Big Idea
The spread is the gap between the bid price (what buyers pay) and the ask price (what sellers receive). That gap is actually a hidden cost you pay every single time you trade.
Think of it like this. Imagine you buy a toy at a store for $10. You walk out the door and immediately try to sell it back to the same store. They only give you $8. Where did the other $2 go? The store kept it. That’s basically the spread.
In trading, the spread is how brokers and market makers get paid. You pay a little bit of it every trade, whether you realize it or not.
How the Spread Works
Let’s use a simple example. A stock is showing these prices:
- Bid: $99.90
- Ask: $100.00
The spread is the difference: $100.00 – $99.90 = 10 cents.
If you buy this stock right now, you pay $100.00.
If you immediately try to sell it, you only get $99.90.
You’ve just lost 10 cents per share without the price even moving. That’s the spread in action.
Why Spreads Exist
You might think, “This seems unfair! Why can’t I just buy and sell at one price?”
The answer is that someone has to be ready to trade with you. In every market, there are companies called market makers whose job is to always have a buy price and a sell price available. They take the risk of holding the stock (or currency, or whatever) between buyers and sellers.
In exchange for that service, they collect the spread. It’s kind of like a small fee for making trading convenient. Without market makers, you might click “buy” and wait hours for someone to sell to you. The spread is the cost of instant trading.
How Spreads Are Measured
Different markets measure spreads differently.
Stocks
Usually measured in cents or fractions of a cent. A “penny spread” ($0.01) is common for big, liquid stocks. Smaller stocks might have spreads of 5 cents, 25 cents, or even more.
Forex
Measured in pips. A 1-pip spread on EUR/USD is very tight. A 3-pip spread is normal. Anything above 5 pips on a major pair is expensive.
Futures
Measured in ticks. For ES (e-mini S&P 500) futures, a 1-tick spread is normal, which equals 0.25 points or $12.50.
Crypto
Varies a lot by exchange and coin. Can be very tight on Bitcoin (basically 1 cent on major exchanges) or huge on small coins.
What Makes Spreads Wider or Tighter?
Spreads aren’t always the same size. They change based on several factors.
Liquidity
The more people trading, the tighter the spread. Popular stocks like Apple might have a penny spread. Obscure stocks might have a 50-cent spread. The more buyers and sellers competing, the smaller the gap.
Volatility
When markets are crazy, spreads widen. Market makers pull back because they don’t want to get caught holding something that’s crashing. During news events or crashes, spreads can explode.
Time of Day
Spreads are tightest when markets are most active. For US stocks, that’s during regular trading hours. For forex, spreads widen overnight or on weekends. Trading at the “wrong” time can double or triple your spread costs.
Size of Your Order
Small orders get the quoted spread. Huge orders might have to “walk the book,” meaning you take several layers of prices at progressively worse levels.
A Real-Life Example
Let me show you how spreads affect trading costs over time.
Sarah trades EUR/USD. The spread at her broker is 1.5 pips. She trades one standard lot (where each pip is worth $10).
So every time Sarah opens a trade, she pays 1.5 pips × $10 = $15 in spread costs.
If Sarah trades 10 times a week, that’s $150 per week. Over a year, that’s about $7,800 just in spread costs.
Meanwhile, her friend Tom uses a broker with a 0.5 pip spread. Same trading, same frequency, but Tom pays only $5 per trade, $50 per week, $2,600 per year.
Tom saves $5,200 per year just by choosing a broker with tighter spreads. That’s a huge difference! Spreads really add up.
Types of Spreads
Fixed Spreads
Some brokers offer spreads that don’t change. The spread might be 2 pips all the time, no matter what the market is doing. Predictable, but usually wider than variable spreads during calm times.
Variable (Floating) Spreads
Most brokers use variable spreads that change with market conditions. Tighter during normal times, wider during news or volatility. Can be cheaper overall but less predictable.
Commission-Based
Some brokers offer super tight spreads (almost zero) but charge a separate commission per trade. Popular with professional traders who value ultra-tight spreads.
Each type has pros and cons. Most beginners do fine with standard variable spreads from a reputable broker.
How Spreads Affect Your Trading
Every Trade Starts at a Loss
Because you buy at ask and sell at bid, every trade starts slightly underwater. The market has to move far enough in your favor to cover the spread before you make any real profit.
Short-Term Trading Gets Expensive
If you’re a scalper making many small trades, spreads eat into your profits fast. You need the price to cover the spread on every single trade. Wide spreads can make scalping impossible.
Long-Term Trading Is Less Affected
If you hold a trade for weeks and make 500 pips, a 2-pip spread doesn’t hurt much. But even long-term traders should care about spreads, especially if they trade frequently.
Your Stop Loss and Target Need to Account for Spread
If your target is 20 pips and the spread is 2 pips, you really need a 22-pip move to hit your target. Many beginners forget this and wonder why they keep just missing their goals.
How to Pay Less Spread
Tip 1: Trade Liquid Markets
Stick to popular stocks, major currency pairs, or top cryptos. These have the tightest spreads because so many people trade them.
Tip 2: Trade During Active Hours
For stocks, that’s regular market hours. For forex, it’s when major sessions overlap (London-New York overlap is best). Avoid dead hours.
Tip 3: Choose the Right Broker
Spreads vary enormously between brokers. Shop around. A broker with spreads that are just 1 pip tighter can save you thousands per year.
Tip 4: Avoid Major News Events
Spreads blow out during big news (Fed announcements, jobs reports, earnings). If you don’t have to trade during these moments, don’t.
Tip 5: Use Limit Orders
Instead of buying at market (paying full ask), place a limit order to try to buy closer to the bid. You might have to wait, but you save money.
Tip 6: Factor Spreads Into Your Strategy
Test your strategy with realistic spread costs included. If your strategy only works when you ignore spreads, it doesn’t really work.
Common Mistakes Beginners Make
Mistake 1: Ignoring Spreads Entirely
Lots of beginners don’t even know spreads exist. They trade, they lose a little money, they don’t understand why. Spreads are a huge part of why.
Mistake 2: Celebrating the Broker with “Zero Commission”
Some brokers advertise “no commissions!” but make up for it with wider spreads. You’re still paying. Compare total costs (spread + commission), not just one piece.
Mistake 3: Trading Thinly Traded Stocks
Small or obscure stocks can have spreads that are 5% or 10% of the price. Trading these is like paying a huge tax on every trade. Stick to liquid stocks unless you really know what you’re doing.
Mistake 4: Assuming Spreads Are Always the Same
Spreads can triple or quadruple during off-hours or news events. A strategy that works great during active hours might lose money during quiet hours because of wider spreads.
Mistake 5: Not Including Spreads in Backtests
Testing a strategy on historical data without including spread costs gives you fake results. Always backtest with realistic spreads included.
Spreads vs Commissions
These are the two main costs of trading. It helps to understand the difference.
Spread is the built-in cost from the bid-ask gap. You pay it whether you realize it or not. There’s no line item on your statement saying “spread.”
Commission is an explicit fee the broker charges for each trade. It shows up clearly on your statement. “You paid $1.99 per trade.”
Some brokers take most of their money from spreads. Others from commissions. A few charge both. When comparing brokers, add up the total cost of a typical trade at each one to see which is actually cheaper for you.
The Big Picture
The spread is one of those hidden costs that separates professional traders from amateurs. Pros obsess over spreads because they add up to thousands of dollars over time. Amateurs ignore them and wonder why they never make real money.
Here’s what to remember:
- The spread is the gap between bid (sell price) and ask (buy price)
- You pay the spread on every single trade, even if you don’t see a line item
- Tighter spreads = cheaper trading. Wider spreads = expensive trading.
- Liquid markets and active hours usually have the tightest spreads
- News events and off-hours usually have the widest spreads
- Choose your broker, timing, and instruments to minimize spread costs
- Factor spreads into your strategy, targets, and backtests
A smart trader once said: “Watch the spread, and the profits will watch themselves.” It’s a small thing that makes a huge difference over time. Respect the spread.
Related Terms
- What Are Bid and Ask? — The two prices that create the spread
- What Is Liquidity? — How liquidity affects spread size
- What Is Slippage? — Another hidden cost to watch out for
- What Is a Pip? — How forex spreads are measured
- What Is Volatility? — Why spreads widen in volatile markets
← Back to the Complete Trading Terms Glossary
Focus on the process. Trust the stats. Stay consistent.