i Short answer
The bid price is what a broker will pay to buy an instrument from you, the ask price is what you'd pay to buy it, and the gap between the two is the spread. This spread is one of the primary ways brokers and market makers earn revenue, often built into the price itself rather than charged as a separate, explicit commission.
Spreads vary based on liquidity, tighter for heavily traded instruments like major forex pairs, wider for less liquid ones, and they often widen further during major news releases or periods of lower trading activity. Try our free Break-Even Price Calculator to work through the numbers yourself.
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Bid-Ask Spread: The Core Mechanics
Always check your specific broker's current spreads directly, as they vary by instrument and market conditions.
1. The bid and ask prices, defined
The bid price is what a broker or market will pay to buy an instrument from you, effectively the price you'd receive if you were selling right now. The ask price (sometimes called the offer price) is what you'd pay to buy that same instrument right now. The ask is always positioned slightly higher than the bid, and the gap between these two figures is what's referred to as the spread.
This two-price structure, rather than a single quoted price, is the standard way virtually all tradeable financial instruments are priced, from forex pairs to shares to commodities.
2. Why the spread exists at all
The spread exists because it's one of the primary mechanisms brokers and market makers use to earn revenue for providing liquidity and facilitating trades. Rather than charging a separate, explicit commission on every single trade, many brokers build their compensation directly into this small gap between buying and selling prices.
This means the cost of trading is embedded in the price structure itself rather than shown as a separate, clearly visible line item, worth understanding explicitly since it's easy to overlook as a genuine trading cost precisely because it isn't itemised the way a commission fee typically is.
3. Why you start slightly behind on every trade
In a practical sense, opening a position and immediately closing it again would typically show a small paper loss equal to the spread, since you bought at the higher ask price and would sell back at the lower bid price. This isn't a hidden trick or unfair practice, it's simply the mechanical cost of entering and exiting a position, conceptually similar to any transaction cost in other markets.
This is precisely why a trade generally needs to move at least past the spread's worth in your favour before you're showing genuine profit, a detail worth factoring into your risk-reward expectations, particularly for shorter-term strategies where the spread represents a proportionally larger share of the expected move.
4. What determines how wide a spread is
Spreads are heavily influenced by liquidity and trading volume. Highly liquid, heavily traded instruments, major forex pairs like EUR/USD or USD/ZAR, for example, typically have tighter spreads, since there's abundant buying and selling activity for the broker or market maker to work with.
| Instrument Type | Typical Spread |
|---|---|
| Major forex pairs | Tightest |
| Minor/cross pairs | Moderate |
| Exotic pairs | Wider |
| Thinly-traded shares | Widest |
Less liquid instruments, exotic currency pairs or thinly-traded individual shares, for example, tend to have wider spreads, reflecting the greater difficulty and risk involved in finding a genuine counterparty for the trade.
5. Why spreads change throughout the day
Spreads aren't fixed, they often widen during periods of lower liquidity, outside major trading session overlaps, around significant scheduled news releases, or during unusually volatile market conditions. This happens because brokers and market makers widen the gap specifically to compensate for the increased risk and uncertainty they're taking on during these periods.
Spreads tend to be at their tightest during peak liquidity hours, when major global trading sessions overlap, worth being aware of if you're planning trades around specific times of day or major news events, since your actual execution cost can genuinely vary based on timing alone.
6. Spread versus a separate commission
Some brokers charge purely through the spread with no separate commission, a model often marketed as "commission-free", though the underlying cost is still very much present, simply embedded in a wider spread than a comparable commission-based account might offer instead.
Other brokers charge a smaller, tighter spread alongside an explicit, separate commission per trade. Comparing the TOTAL cost, spread plus any applicable commission combined, gives a considerably more accurate picture of your genuine trading cost than looking at either figure in isolation, worth calculating explicitly when comparing brokers rather than assuming "no commission" automatically means cheaper overall.
Key Takeaways
- The bid price is what you'd receive selling an instrument right now, the ask price is what you'd pay buying it right now, the gap between the two is the spread.
- The spread is one of the primary ways brokers and market makers earn revenue, often embedded in the price itself rather than charged as a separate, explicit commission.
- Opening and immediately closing a position typically shows a small paper loss equal to the spread, a trade generally needs to move past this amount before showing genuine profit.
- Spreads are heavily influenced by liquidity, highly traded instruments like major forex pairs typically have tighter spreads than less liquid instruments like exotic pairs or smaller shares.
- Spreads often widen during periods of lower liquidity, major news releases, or unusually volatile conditions, and tend to be tightest during peak trading session overlap hours.
- Comparing the total cost, spread plus any separate commission, gives a more accurate picture of a broker's actual trading cost than looking at either figure in isolation.
Frequently asked follow-up questions
What exactly are the bid and ask prices?
The bid price is what a broker or market will pay to buy an instrument from you, the price you'd receive if selling right now. The ask price (sometimes called the offer price) is what you'd pay to buy that same instrument right now. The ask is always slightly higher than the bid, and the gap between the two is the spread.
Why does the spread exist at all?
The spread exists because it's one of the primary ways brokers and market makers earn revenue for providing liquidity and facilitating trades. Rather than charging a separate, explicit commission on every trade, many brokers build their compensation into this small gap between buying and selling prices, meaning the cost is embedded in the price itself rather than shown as a separate line item.
Does the spread mean I lose money the instant I open a trade?
In a practical sense, yes, if you open a position and immediately closed it again, you'd typically show a small paper loss equal to the spread, since you bought at the higher ask price and would sell back at the lower bid price. This isn't a hidden trick, it's simply the mechanical cost of entering and exiting a position, similar in principle to any transaction cost, and it's why a trade generally needs to move at least past the spread's worth before you're in genuine profit.
Why do spreads vary between different instruments and brokers?
Spreads are heavily influenced by liquidity and trading volume, highly liquid, heavily traded instruments (like major forex pairs such as EUR/USD) typically have tighter spreads, since there's abundant buying and selling activity for the broker or market maker to work with. Less liquid instruments, exotic currency pairs or smaller shares, for example, tend to have wider spreads, reflecting the greater difficulty and risk involved in finding a counterparty.
Do spreads change throughout the trading day?
Yes, spreads often widen during periods of lower liquidity, outside major trading session overlaps, around significant news releases, or during unusually volatile market conditions, since brokers and market makers widen the gap to compensate for the increased risk and uncertainty during these periods. Spreads tend to be tightest during peak liquidity hours when major trading sessions overlap.
How does the spread compare to a separate commission fee?
Some brokers charge purely through the spread with no separate commission, a model often described as commission-free, though the cost is still very much present, just embedded in a wider spread than a comparable commission-based account might offer. Other brokers charge a smaller, tighter spread alongside an explicit separate commission per trade. Comparing the TOTAL cost, spread plus any commission, gives a more accurate picture than looking at either figure in isolation.
📚 Sources & further reading
This article draws on established trading education resources. Always verify your specific broker's current spreads directly.
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