What Is a Spread? Trading Costs Explained Simply
The spread is the most misunderstood trading cost. Here's how to read it — and why it usually matters more than commissions.
Bid, ask, and the spread — the ninety-second version
Open any quote and you'll see two prices: the bid (what someone is willing to pay to buy from you right now) and the ask (what someone is willing to sell to you right now). The gap between them is the spread. If EUR/USD shows 1.0850 bid / 1.0851 ask, the spread is one pip (0.0001). You buy at the ask, you sell at the bid. The moment you enter a trade, you're already down by the spread — that's the cost of instant liquidity.
How brokers actually charge you
There are two pricing models. Market-maker or standard accounts quote you a wider spread and take no commission — the spread is their margin. Raw-spread or ECN accounts quote you the actual interbank spread (often 0.0 pips on major FX pairs) and charge a fixed commission per lot. On paper, raw + commission is almost always cheaper for anyone trading more than one or two lots a day. "Commission-free" almost never means "cost-free" — the cost is just hidden inside the spread.
Fixed vs variable spreads
Fixed spreads stay the same regardless of market conditions. They sound safer but are always wider than average variable spreads because the broker prices in a buffer for volatility. Variable spreads move with the market: 0.2 pips on EUR/USD during London-New York overlap, 3+ pips during Asian session gaps, 20+ pips in the seconds after major news. If you scalp or trade around news, always know whether your account is fixed or variable, and never place market orders during a data release on a variable-spread account unless you understand slippage.
Spreads on stocks, indices, and crypto
On stocks, spreads are usually a few cents on liquid names (SPY, AAPL) and can be dollars wide on illiquid microcaps or pre-market trades. On CFD indices, typical spreads are 0.5–1.0 points on the S&P 500, 1–2 points on the Nasdaq, 1–2 points on the DAX. On crypto, spreads can be 0.1% on BTC/USD at a top exchange and easily 3–5% on altcoins at a broker — the single biggest hidden cost in retail crypto trading. Always check the spread as a percentage of the price, not in absolute terms.
Practical rules to keep spread costs low
One: trade only during the most liquid session for the asset — London/New York overlap for FX, US cash session for US stocks. Two: use limit orders when your entry isn't time-critical; they let you set the price you're willing to pay. Three: avoid trading in the first and last five minutes of a session unless you have a specific reason — spreads widen at both ends. Four: for anything above about $10,000 of monthly volume, an ECN or raw-spread account almost always beats a standard commission-free account. Five: compare all-in cost (spread + commission + swap) for one week of your realistic trades before switching brokers — not the marketing headline.
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