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What is a spread? How do I find out how much I pay for a trade?

Updated on February 12, 2024

Do you trade on forex or financial markets and want to find out how much it will cost you to trade with a broker? Then it’s a good idea to find out how high the spread is with your broker. You don’t know what a spread is? The spread is one of the basic fees you pay your broker. It is measured in pips. So let’s take a look at what a spread is and how to calculate it.

What is a spread?

Spread from 0 pips, reports ads on various brokers. Have you seen ads like this before? And have you ever thought about what a spread is? And is such a broker really beneficial for you? The spread is one of the basic fees you will pay your broker. Of course, if you open a live account with him and close trades through him. You will pay the spread not only on forex, but also on other exchanges.

More precisely, the spread is the difference between the buying and selling price of a given asset at a given time. The amount of the spread varies between individual brokers. And the spread also differs between individual assets. If we take forex, for example, the amount of the spread will also differ between individual currency pairs. Some brokers have fixed spreads. This means the spreads are fixed. But other brokers have these spreads variable. And that is why it is necessary to always keep an eye on the amount of the spread.

What is the spread for?

As we have already mentioned, the spread is the difference between the buying and selling price. We always pay it when the store opens. For us, it is simply the cost of opening a store. So if we enter the trade, we are suddenly in the red. But we have to reckon with that. Therefore, before opening each position, it is good to think carefully about whether it will pay off for us.

Spread therefore serves brokers. After all, the broker also has to earn something. And that’s just on the fees. So also on spreads. And if we also take into account CFD brokers, where you invest in derivatives on forex and other markets, not in physical assets, they will earn not only from fees, but also from your profitable investments.

How to calculate it

The amount of the spread will always be given in pips. With some brokers, it is not necessary to calculate the spread at all. You have it listed for the given assets. If we take the XTB broker and its xStation5 platform, for example, you can see the spread every time you click on a given asset. In the picture, you can look specifically at this platform. It is one of the main pairs on Forex AUD/USD. That is, the Australian dollar and the US dollar.

Spread na xStation5

Calculating the spread is not complicated. You must take into account the 4th digit after the decimal point. The expression pip is used to avoid the need to name decimal places when specifying the amount of the spread. That’s why just pip. In the picture you can see how much you can buy and sell this pair on Forex. And it is the difference between this purchase and sale price that is the resulting amount of the spread. Specifically, in xStation5, it is not necessary to calculate the spread, because the amount of the spread is indicated in the middle in a white circle. Specifically 1.3 pips.

You also have this pip highlighted in bold in the image. So that you know which specific numbers to subtract from each other. Since all numbers up to the 4th decimal point are the same, there is no need to subtract anything. It changes up to the 4th and 5th decimal places. So we have to subtract 19.4 and 18.1. This means the highlighted values ​​and the number after them, which we need to put after the decimal point. And the spread result is 1.3 pips. Exactly as the broker tells us. So this is how you calculate the spread.

The specific price of the spread

Now you know what a spread is and how it is calculated. But you will certainly be interested in how much money you will pay for a specific amount of spread not only on forex. The specific value of the spread will depend on the volume of your trade. It is counted in lots. And the spread is always given for one lot.

So if the volume of your order will be 1 lot, then the spread will be 1.3 pips. One lot is always 100,000 currency units. Let’s call it the US dollar. So the spread price calculation will look like this: 0.00013 x 100,000. The resulting number will be equal to dollars. So we will pay 13 dollars for one lot. Of course, we adjust the calculation according to the amount of money we want to invest.

Spread – summary

What should you take away from this article? Mainly info about what a spread is. So now you know that it is the difference between the buying and selling price of a Forex pair or other asset. It is the 4th number after the decimal point. We calculate it by subtracting the sale price from the purchase price. To be able to calculate exactly how much you will spend on the spread during your purchase, remember that you have to multiply the spread by the volume with which you want to close the trade.

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