Understanding Spreads
Determining your exchange rate
The topic of spreads in the foreign exchange market isn’t widely understood because it’s somewhat complex. And yet the spread is precisely what determines your exchange rate…and your costs. This page covers spreads as they relate to transferring funds.
To learn more about spreads and currency trading, visit the OANDA Spreads section of the OANDA FXTrade site.
What is a spread?
First, the math. Whenever you exchange currency, you are simultaneously selling your own currency and buying the foreign currency. A spread is the difference between the bid price (the price you sell at) and the ask price (the price you buy at) of a currency pair, quoted in a decimal value called pips. For example, if the quote between EUR/USD at a given moment is 1.2222/4, then the spread is 0.0002 or 2 pips. If the quote is 1.22225/40, then the spread is 0.00015 or 1.5 pips. Wider spreads (more pips) result in a higher ask price and a lower bid price, which means you pay more to exchange your money.
Second, the goods. The spread is how brokers earn their money. Whenever you perform a transfer that requires exchanging currency, a broker (like OANDA) connects you to the global currency market. Wider spreads mean that less of your money is actually being exchanged and transferred. The difference between the spread your broker offers you and the spread your broker pays in the currency market is the “fee” they earn for exchanging and transferring your money.
Why are spreads so important?
Spreads affect your transfer costs in a big way. The wider the spread, the more you pay to buy foreign currency and the higher your transfer costs. FXGlobalTransfer offers you some of the lowest spreads in the industry, saving you money.
Although a pip may seem small, a movement of one pip in either direction can translate into thousands of dollars in gains or losses in the interbank market. Not convinced? Check out our Cost Comparison page.
Spread Policies: what other brokers say
Spread policies differ considerably from broker to broker. In fact, most brokers don't even mention the word “spread” because they don’t want to uncover their hidden fees.
The exchange rates posted by other brokers are usually daily rates, which means they are set in the morning and don't change at all throughout the day. While a broker might boast that there’s room for negotiation, daily rates usually have such wide spreads that brokers lose very little by giving you a slightly better rate. These wide spreads help mitigate the risk of rate fluctuation throughout the day - the only way your broker can ensure profit on almost every transaction.
Determining your exchange rate
The topic of spreads in the foreign exchange market isn’t widely understood because it’s somewhat complex. And yet the spread is precisely what determines your exchange rate…and your costs. This page covers spreads as they relate to transferring funds.
To learn more about spreads and currency trading, visit the OANDA Spreads section of the OANDA FXTrade site.
What is a spread?
First, the math. Whenever you exchange currency, you are simultaneously selling your own currency and buying the foreign currency. A spread is the difference between the bid price (the price you sell at) and the ask price (the price you buy at) of a currency pair, quoted in a decimal value called pips. For example, if the quote between EUR/USD at a given moment is 1.2222/4, then the spread is 0.0002 or 2 pips. If the quote is 1.22225/40, then the spread is 0.00015 or 1.5 pips. Wider spreads (more pips) result in a higher ask price and a lower bid price, which means you pay more to exchange your money.
Second, the goods. The spread is how brokers earn their money. Whenever you perform a transfer that requires exchanging currency, a broker (like OANDA) connects you to the global currency market. Wider spreads mean that less of your money is actually being exchanged and transferred. The difference between the spread your broker offers you and the spread your broker pays in the currency market is the “fee” they earn for exchanging and transferring your money.
Why are spreads so important?
Spreads affect your transfer costs in a big way. The wider the spread, the more you pay to buy foreign currency and the higher your transfer costs. FXGlobalTransfer offers you some of the lowest spreads in the industry, saving you money.
Although a pip may seem small, a movement of one pip in either direction can translate into thousands of dollars in gains or losses in the interbank market. Not convinced? Check out our Cost Comparison page.
Spread Policies: what other brokers say
Spread policies differ considerably from broker to broker. In fact, most brokers don't even mention the word “spread” because they don’t want to uncover their hidden fees.
The exchange rates posted by other brokers are usually daily rates, which means they are set in the morning and don't change at all throughout the day. While a broker might boast that there’s room for negotiation, daily rates usually have such wide spreads that brokers lose very little by giving you a slightly better rate. These wide spreads help mitigate the risk of rate fluctuation throughout the day - the only way your broker can ensure profit on almost every transaction.
