When it comes to choosing a broker, ‘tight spreads’ is often the thing you see all over the advertising banners. But, just what is a forex spread, what’s tight, and why is it so important? Keep reading to get the whole story.
What is a forex spread?
To better understand the mechanics of a forex spread, let’s first look at something a little more familiar. Online shopping. Amazon made it hugely popular, but in the early years, people were untrusting of online stores. Few people were willing to give out their personal details and payment information, but that’s all changed in recent years. Younger generations are far more familiar with secure signup and encrypted account access. Here’s a detailed example to better explain the similarities.
Let’s say you see a pair of sunglasses that you simply must have. The price is better than ever, and you decide to act fast before the deal of the year disappears. You’ve already got a verified account, so ordering is as simple as clicking a button and confirming. The seller receives the order and processes the request. Sound familiar?
So how does the seller make a profit? You probably already know the answer… the price markup. The seller might pay $100 for the glasses but sell them to you for $150. This is a 50% markup price. This is expected, and nobody has an issue with it. It’s the standard business practice the world over, and every high street store does it. It’s exactly the same for a broker, only the markup is called ‘the spread.’
Why do brokers have a spread?
Brokers use spread because of the nature of forex. A shop only sells. A broker lets clients buy as well as sell. Let’s look at buying first.
Buying
Take a look at these trading conditions:
- Currency pair: EURUSD
- Buy Rate: 1.1400
- Sell Rate: 1.1300
- Forex spread: 0.0100 (Buy/Sell difference)
Let’s say you wish to ‘Buy’ EURUSD. You’ll effectively agree to a contract that says you will buy euro at the current Buy Rate, and sell the euro at a future Sell Rate. After a few days, the trading conditions change.
- Currency pair: EURUSD
- Buy Rate: 1.1600
- Sell Rate: 1.1500
You decide to sell or close your CFD, so you cancel the contract and receive 115USD based on the Sell Rate. Your initial EURUSD ‘Buy’ order cost 1.1400, which means you profited, and if your trading volume was high with significant leverage, then the result could have been quite sizable.
So how do brokers profit?
There’s no mystery to how brokers profit. It’s right there on your trading platform. No secret commissions or hidden fees. Simply, the Sell Rate is always lower than the Buy Rate. If, on any day, you bought EURUSD then sold it within 10 seconds, you’d lose money. If the forex spread is 0.01, then the market price needs to move in your favor by at least 0.02 to become profitable for you.
Choosing the right broker
Forex Spreads don’t vary much from broker to broker. There are many brokers and the ones that have high spreads struggle to keep traders who are always looking for the very best deal. The one deciding factor you should consider when choosing your broker is reputation.
Reputable brokers have regulatory certification within their international business entities, and that is very important. Again, similar to Amazon sellers, some have certified status and therefore considered more trusted.
In the forex industry, two of the most well-known and trusted regulators for Europe are CySEC (Cyprus Securities and Exchange Commission) and the FCA (Financial Conduct Authority) for the UK. These two organizations are perhaps the most stringent when it comes to ensuring safe and fair trading conditions. They demand client fund protection and insurance, and they monitor closely the trading history and even marketing campaigns. A regulated broker making false promises will be severely punished and publicly outed without mercy. A non-regulated broker can say anything, and very often does exactly that.
Why Exness?
Exness prides itself on competitive spreads, low deposits, and fast withdrawals. Most interestingly, Exness (Cy) Ltd. boasts a CySEC regulatory license, while Exness (UK) Ltd. proudly holds the FCA equivalent. Simply put, what you see and read is exactly what you get… without exception.
The new Exness sign up process can take less than 20 minutes, and you can be approved for trading on the foreign exchange market on the same day. The demo account gives new traders a chance to get familiar with the trading platform and the markets during your application, and a team of professionals is just a chat away should you have questions or concerns.
Trading can be entertaining, exciting, and offers financial opportunities that can change your life. Start low and slow, build your portfolio over time, and start thinking about the long-term with a rosy outlook.
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