• The basics of a spread

Spreads are defined as the price difference between the bid and ask prices. In fx, a bid is defined as the maximum price a buyer is willing to pay for a security; while the asking price is simply the maximum price at which a trader is willing to purchase a particular security. So, the difference between these two prices, the bid price and the asking price, is defined as a spread.

To understand the basics of a spread, there is the need to know what a spread is and how to calculate a spread. The spread comes into play in every trade because it is rare to carry out a transaction where the bid price and the asking price are exactly the same, there is always a spread.

Here is how to calculate a spread:

Basically, fx prices are quoted in four decimal places, that is, five digits with a decimal point after the first digit. Let us take the Euro/US dollar for example.

And the selling price = 1.35326

The spread, in this case, is gotten by finding the difference between the buy price and the selling price

Therefore,

The spread = 1.35356 – 1.35326

Basically, the spread of the transaction is 0.0003.

The percentage in point stands for Point in Percentage. It is simply a point for calculating profits and losses in a trade. The percentage of point value is the fourth digit after the decimal point. In this case, the percentage of point  value is 3 percentage in point.