The bid/ask spread is the difference between the Bid price and the Ask price. The bid/ask spread is the difference between the bid and ask price.
The “ask” price is also known as the “offer” price. It’s the difference between the buyer’s and seller’s prices. The “bid “represents demand and the “ask” represents supply for an asset.
In other words, it’s what the buyer is willing to pay for something versus what the seller is willing to get in order to sell it
The spread is the transaction cost.
“Price takers” buy at the ask price and sell at the bid price. “Market makers” buy at the bid price and sell at the ask price. In forex trading, YOU are considered a price taker. And your forex broker is the price maker, also known as a market maker.
This means:
- The BID represents the price at which the forex broker is willing to buy (from you) the base currency in exchange for the counter currency.
- The ASK price is the price at which the forex broker is willing to sell (to you) the base currency in exchange for the counter currency.
For you, the price taker, the SPREAD is the difference between the buy (ASK) and sell (BID) price.
A simple analogy is to pretend that you’re visiting a car dealer. You see a car you like and inquire about the price. The car dealer “asks” for $20,000. Notice how the “ask price” is from the perspective of the car dealer. This means that the car dealer is willing to sell you the car for $20,000. Now let’s say you’re interested but would like to trade in your current vehicle, a truck. The car dealer “bids” $5,000 for the truck.
Notice how the “bid price” is from the perspective of the car dealer. This means that the car dealer is willing to buy the truck from you for $5,000. If you think you can get a higher price for the truck, you’re free to get “bids” from other people as well.
Your forex broker is like the car dealer, so you can apply these same concepts in forex trading.
In summary, the spread is the difference between the buy (ask) and sell (bid) price quoted on your trading platform and is payable on opening and closing a position.