Bid, Ask, Spread and Quote
Foreign exchange market, also known as the FX market, treats currency as a commodity. The operations in the market are based on the trading and selling of currencies. Traders buy and sell currency to try to make profit. Like any other market, the trader will buy at one price and sell at a higher price. Bid, Ask, Spread and Quote are terms often used in the forex maket. Let’s have a closer look on these terms.
Bid, Ask and Spread
Currencies are traded in pairs and settled when the buy price or ‘BID’ matches the sell price or the ‘ASK’.
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The difference between the ‘bid’ and the ‘ask’ is called the ‘spread’ , and it goes to the market maker and forms his major source of income.
In other words, spread represents the difference between what the market maker gives to buy from a trader, and what he takes to sell to a trader.
The following example will present the point clearly. The EUR/USD bid/ask rate is 1.2100/1.2200. The market maker gives $1.21 when buying from the trader, but takes $1.22 when selling to the trader. If traders buy and sell immediately without any change in the exchange rate, they lose money. This happens because of the spread – traders pay more to buy the currency than they receive when they sell in that one moment.
Major currencies
The most traded currency in the market is United States dollar (USD). There are other five more “major” currencies that come next to USD: the euro (EUR); the Japanese yen (JPY); the British pound sterling (GBP); the Swiss franc (CHF), and the Australian dollar (AUD). Volume of trades in these six major currencies makes out 90% of the market.
Quote
The ‘quote’ is the price of a currency. It is the price to a currency pair that the deal will be made with. This is unlike an ‘indication’, where the price given by a market maker is only information. There are two forms of quotes in the Forex market, i.e., direct quotes, and indirect quotes.
A direct quote is the price for one US dollar in terms of another currency. In fact, most currencies are quoted against the USD . The exceptions are the EUR, GBP, AUD, NZD, which are indirect quoted.
An indirect quote is the price for one UNIT of another currency in terms of the US dollar, for example: EUR/USD.
The forex market is now nearing forty years old, and going strong in terms of wider geographic participation and volume. The daily average volume exceeds three trillion dollars today.
The forex market participants include governments, banks, financial institutions, companies and retail traders from countries around the world. The volume, liquidity and an almost uninterrupted trading period offer investors and trades tremendous opportunity to make profit from FX market, provided they are adequately trained and well equipped to take wiser and profitable trading decisions.
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