When it comes to spreads in stocks or forex, many people think it's a complicated concept. But actually, it's very simple — just the difference between the buy price and the sell price.

What is a stock spread? Basically, when you want to trade a currency pair or a stock, the market will quote you two different prices. One is the bid price (buy price), and the other is the ask price (sell price). The difference between these two prices is called the spread. It is the hidden cost you pay each time you trade.

A simple example: if EUR/USD is quoted at 1.1021/1.1023, then the spread is 2 pips (each pip = 0.0001). This is calculated in pips because it is the smallest unit of price movement. It’s no coincidence that brokers design it this way — they make money from this difference, not from separate commissions.

There are two types of spreads you need to know: fixed spread and floating spread. Fixed spread is offered by brokers when they operate as market makers. The advantage is that you always know exactly what the cost will be, making it easier to predict. But the downside is that during rapid market movements, you may encounter requotes (the broker asks you to accept a new price) or slippage (the final price differs significantly from your order price).

Floating spread, on the other hand, always changes according to market conditions. Non-dealing desk brokers provide this type, sourcing prices from multiple liquidity providers. The benefit is no requotes and more transparent prices. But the issue is that spreads can widen significantly during critical moments, especially when major news is released or during low liquidity periods.

Regarding how to calculate spreads in actual trading: suppose you trade 1 EUR/USD contract with a spread of 0.9 pips. If 1 pip equals $10, then the spread cost you pay is $9. Trading 10 contracts? That’s $90. It seems small, but if you’re scalping or trading frequently, it can quickly eat into your profits.

Three main factors influence the spread: liquidity, trading volume, and volatility. When liquidity is high (many buyers and sellers), spreads tend to be narrower. Large trading volume also reduces the spread. But during high volatility, spreads can widen significantly.

There are two times when spreads tend to widen most easily: first, during market sessions (when liquidity is very thin), and second, before major news releases. At these times, spreads can increase from 1-2 pips to 5-10 pips or even more. If you are a short-term trader, you should avoid trading during these periods.

Want to minimize spread costs? There are two main ways. One is to trade only during the most active market hours when spreads are narrowest. The other is to focus on highly liquid currency pairs or stocks like EUR/USD or GBP/USD. When many traders are active, market makers compete and narrow the spread to attract customers.

Finally, spreads are not only present in forex. They also appear in stocks (the difference between bid and ask prices), bonds (the yield spread between two bonds), or futures (the price difference between different maturities). Every market has a spread, and understanding it will help you better manage your trading costs.