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What is the spread? Bid and Ask prices

The Spread is the difference between the sale price (Ask) and the purchase price (Bid) of an asset (Commodities, currencies, shares, etc.). There are several factors that influence the value of the Spread, among which are find:

The most traded assets tend to have lower spreads than those that are usually traded little. For example, the EUR / USD pair, a highly traded and traded currency pair, has a much lower spread level than the USD / CLP, a currency pair with little trading volume.

The exchange rate fluctuates at all hours and every day (this is how the exchange houses make their money), today the exchange rate of your currency against the dollar could be 3.31 but tomorrow it could rise to 3.41, this means that the dollar would have become more expensive. Perhaps in a week the exchange rate will drop to 3.02, which would mean that the dollar has become much cheaper for you.

A currency trader or trader takes advantage of these variations in the price of currencies to make money.

Bid and Ask

Assets usually have two prices (you will have seen them if you have already traded), these are the Bid and the Ask.

BID price

The Bid is the purchase price (the price that a buyer is willing to pay).

ASK price

The Ask is the selling price (the price that a seller is willing to receive).

The purchase or Bid price will always be lower than the sale or Ask price and we will see why. The Bid is lower because a buyer will always seek the lowest possible price (he wants to buy cheap) and the Ask is always higher because a seller will seek the highest possible price (wants to sell high).

When you want to buy an asset such as a share or a currency pair, the price you will pay will be the Ask price and when you want to sell an asset you will pay the Bid price.

Why?

In order for orders (from both sellers and buyers) to be settled (that is, executed), there must be traders willing to cover both the Bid and Ask prices.

When you decide to buy (if you want your order to be executed instantly) you will do so at the lowest Ask price in the market. And when you decide to sell (if you want your order to be executed instantly) you will do so at the highest Bid price in the market.

This means that the orders of both sellers and buyers are covered and can be executed. The Bid and Ask may vary and that will depend on what we mentioned at the beginning of this article.

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