For traders looking for brokers or purchases, the spread comparison is their main tool for making many important and valuable decisions.
All trading in forex is done in currency pairs. With every transaction, two currencies are being compared to each other, or quoted against one another. A currency pair is how every sale or purchase is presented by brokers to traders. One is the base (2nd) and one (1st) is the quote. The number will be what one currency is worth in terms of the other. So, a currency pair quote with the notation USD/EUR will be comparing the U.S. Dollar to the Euro. It will be presenting how many Euros the US dollar is worth.
When it comes to what numbers are important, it depends on which players in the forex market that you are referring to. In forex, brokers are paid differently than in regular national economic markets. Forex brokers do not make commission. For brokers, their main concern (and what determines their income) is always the spread and spread comparisons. The spread is the number of percentage in point or price interest point (usually referred to as pips) between the original asking price and the bid price. Pips are the smallest movements the currency value can make. The broker pays a certain amount for currency. Then they sell for a slightly different price and cover the asking price and keep the difference. It is always right around the price that the broker paid, so if they bought currency for 2.500, then they might let a trader buy it for 2.501. The spread is always covered and the difference is what the broker gets.
Comparing the spreads in quotes for two difference currency transactions will make it clear which is more profitable for each party to the trading. A larger spread will mean the price is raised and the broker is making that difference. It might discourage a sale wherein the quote is higher than the practical value of the original asking price. Traders can bid lower and hope to get closer to the actual value, but usually the only one who benefits from the spread is the broker. The spread can actually affect the profits of the trader when they try and sell that currency if the value starts to go down. They may have already paid too much and the loss will exceed the value if they had actually paid the original value.
The Importance of Comparisons
Spread comparisons are important for buyers, sellers and traders. The broker depends on the spread for his income. The trader is the one who has to focus on the spread the most because it can make or break their investment portfolio. If spreads are not compared, traders can end up throwing their money away and overpaying for currency. Then when they sell, they take a loss. So, not comparing spreads can result in the trader losing both at the time of purchase and at the time of sale. The spreads do affect everyone’s income, prices paid and the overall value of the currency eventually. The spread comparison is the best or worst aspect of marketing a currency pair. So, it does behoove the broker to keep it reasonable, while still maintaining enough of a sale volume to make money on the smaller, more reasonable spreads.