In CFD Trading, the spread is the difference between the "bid" and "ask" price of an asset.
In the Forex market, the spread is measured in PIPS. When trading other assets such as Stocks or Commodities, the spread is simply calculated as the difference between the ‘buy’ and ‘sell’ price of the underlying asset.
In this example, we will look at the EUR/USD currency pair.
- 1.18364 is the price at which you can buy the Euro
- 1.18356 is the price at which you can sell the Euro
To calculate the spread, subtract the bid price from the ask price. In this case, the spread is 0.00008 (1.18364 – 1.18356).
Factors that Influence the Spread
The two main factors that can impact the spread are Liquidity and Market Volatility. As a rule, spreads are usually affected in this way:
- Higher volatility means higher spreads
- Higher liquidity means lower spreads
It’s important to bear in mind that the spread is constantly changing due to these two factors, and spreads vary depending on the asset and market being traded on.
Forex is considered to be the largest and most liquid global market, carrying higher leverage options up to 1:500. The highly volatile Crypto Market, on the other hand, has a leverage cap of 1:100. Read more about leverage here.
