How to Understand the Forex Market: The Spread

Stocks, bonds, futures, etc. all have set commission rates, how much it costs you the investor to buy shares of a stocks or commodity. However, in Forex Trading this commission is usually absent. Why? Because brokers make money from the spread. What is the spread? Good question.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Computer
• Internet
• Basic Intelligence
• Forex Account

1. Bid-Bid Farewell
   The bid price is the price you will receive when you sell your currency pair.

2. Ask-Ask and you shall receive
   The ask price, is the price the market is asking to buy the pair for.

3. To illustrate, if the pair Euro/USD offers a bid price of 1.5900 and an ask price of 1.5904. If you bought the pair at 1.5904, you would of course be able to sell it immediately, but you would realize a loss of four pips.

4. Why is there a spread Anyway?
   
   The spread is for the broker, he gets paid for conducting your trades.

5. Do other markets have spreads?
   Yes, the stock market has spreads as well, but these spreads are usually higher than the Forex Market.

Tips & Warnings

• The Forex Market is potentially profitable, but also risky, make sure you practice paper trading.
• Forex trading has risk involved. Don't trade with money you can't afford to lose