What Is a Spread in Trading?

1. Bid and ask prices, explained clearly

Any tradeable instrument quotes two prices at once: the bid price, at which you can immediately sell, and the ask price (sometimes called the "offer"), at which you can immediately buy. The ask always sits slightly above the bid, and that gap is the spread.

The practical effect is that the moment you open a position, you're already down by the size of the spread. Close it right away and you'd take that small loss even if the instrument's price hadn't moved at all in the meantime.

2. Why the spread exists as a market structure

The spread exists because market-making carries real cost and risk for whoever is quoting the price, whether that's a broker directly or the liquidityLiquidity describes how easily an instrument can be bought or sold without significantly affecting its price.Click to read more → providers behind an ECN execution model. Offering instant, continuous buy and sell pricing ties up capital and exposes the quoting party to risk, and the spread is what compensates for that.

In busy markets with many participants, competition between liquidity providers pushes spreads tighter, since everyone is trying to win order flow with the best pricing. In thinner markets, fewer providers means less competitive pressure and genuinely higher risk in quoting a price at all, so spreads sit wider.

3. Factors that cause spreads to widen or narrow

Three things mainly drive spreads wider or narrower: overall liquidity (spreads widen in off-peak hours when fewer participants are trading), volatilityVolatility measures how much and how quickly an instrument's price fluctuates.Click to read more → around scheduled news or surprise events (uncertainty makes it riskier to quote a price, so spreads jump), and the instrument's general popularity (major forex pairs stay consistently tighter than less-traded pairs or certain commodities).

This matters in practice: opening or closing a trade right around a major news release means paying a noticeably higher built-in cost than you would during calmer, more liquid conditions on the same instrument.

4. Calculating the actual cost a spread represents

What a spread actually costs you on a given trade comes down to two things: the spread's size, usually measured in pipsA pip is the smallest standard price movement in a currency pair, typically the fourth decimal place.Click to read more → for forex pairs, and your position size. The same pip spread costs more in rand terms on a bigger position. That cost lands the instant you open the trade, and price needs to move enough to cover it before you're actually in profit.

For traders placing a lot of trades, especially higher-frequency styles, this cost adds up fast across total volume. That's why comparing spreads across brokers is worth the time for anyone trading often, since the saving compounds over hundreds of transactions.

5. Fixed versus variable spreads

Some brokers, typically market makers, offer fixed spreads that hold constant regardless of market conditions, which some traders value for risk planning since the exact cost is known in advance. Others, usually those running ECN-style execution, offer variable spreads that move in real time with actual liquidity, tighter in normal conditions but wider and less predictable when liquidity dries up or volatility spikes.

Neither is objectively better. Fixed spreads trade away the occasional tighter pricing you'd get from a variable model in exchange for certainty. Variable spreads can average out cheaper over time, but you give up certainty about what any single trade will cost, particularly in volatile stretches.

6. Why comparing spreads across brokers matters practically

Since the spread is an unavoidable cost on every single transaction, comparing typical spreads across two or three candidate FSCA-regulated brokers for the instruments you'll actually trade is some of the most concrete due diligence you can do. It translates directly into calculable cost differences that add up over your trading history.

Do this comparison for your specific instruments rather than in general, because competitiveness varies by category even within one broker. A broker with tight spreads on major forex pairs might be far less competitive on gold or a minor currency pair, which makes instrument-specific checking more useful than trusting a broker's blanket "low-cost" marketing.

CFD and forex instruments give South African traders access to global markets from a single ZAR-denominated account without needing separate international brokerage relationships. This accessibility comes with structural characteristics that traders must understand clearly. CFDs are derivative instruments, you never own the underlying asset, and profit or loss is purely the mark-to-market difference between entry and exit prices multiplied by position size. The overnight financing charge applies to the full notional value of leveraged positions, not just the deposited margin. For traders holding positions for multiple days or weeks, this financing cost compounds and can meaningfully reduce the profitability of otherwise successful trades. Understanding the exact financing rates your broker applies to each instrument class before trading is fundamental preparation, not an optional detail.

CFD and forex instruments give South African traders access to global markets from a single ZAR-denominated account without needing separate international brokerage relationships. This accessibility comes with structural characteristics that traders must understand clearly. CFDs are derivative instruments, you never own the underlying asset, and profit or loss is purely the mark-to-market difference between entry and exit prices multiplied by position size. The overnight financing charge applies to the full notional value of leveraged positions, not just the deposited margin. For traders holding positions for multiple days or weeks, this financing cost compounds and can meaningfully reduce the profitability of otherwise successful trades. Understanding the exact financing rates your broker applies to each instrument class before trading is fundamental preparation, not an optional detail.