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Like any financial market the Forex market has a bid ask spread. This is simply the difference between the price at which a currency pair can be bought and sold. Bid Price — Used when selling a currency pair. It reflects how much of the quoted currency will be obtained if buying one unit of the base currency. Ask Price -Used when buying a currency pair.

It reflects the amount of quoted currency that has to be paid in order to buy one unit of the base currency. Remember from the lesson on Forex currency pairs that the base currency is the one in front while the quote currency is the second. The most important thing to remember is that the bid price is used for selling while the ask price is used when buying.

At the end of the day all of these intricacies are taken care of for you by your broker. All you need to know is whether you want to go short sell or go long buy and your broker does the rest. While the major currency pairs and even some crosses have decent spreads, some of the more exotic currency pairs can have wide spreads, creating a large deficit as soon as you enter a trade. When faced with a standard bid and ask price for a currency, the higher price is what you would pay to buy the currency and the lower price is what you would receive if you were to sell the currency.

An indirect currency quote expresses the amount of foreign currency per unit of domestic currency. The currency to the left of the slash is called the base currency and the currency to the right of the slash is called, the counter currency , or quoted currency. Consider the Canadian dollar. This represents a direct quotation, since it expresses the amount of domestic currency CAD per unit of the foreign currency USD. Next, consider the British pound. This represents an indirect quotation since it expresses the amount of foreign currency USD per unit of domestic currency GBP.

When dealing with currency exchange rates, it's important to have an understanding of how currencies are quoted.

Suppose there is a Canadian resident who is traveling to Europe and needs euros. The calculation would be different if both currencies were quoted in direct form. In general, dealers in most countries will display exchange rates in direct form, or the amount of domestic currency required to buy one unit of a foreign currency.

When dealing with cross currencies , first establish whether the two currencies in the transaction are generally quoted in direct form or indirect form. If both currencies are quoted in direct form, the approximate cross-currency rate would be calculated by dividing "Currency A" by "Currency B.

If one currency is quoted in direct form and the other in indirect form, the approximate cross-currency rate would be "Currency A" multiplied by "Currency B. When you calculate a currency rate, you can also establish the spread, or the difference between the bid and ask price for a currency. More importantly, you can determine how large the spread is. If you decide to make the transaction, you can shop around for the best rate.

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Rates can vary between dealers in the same city. Spending a few minutes online comparing the various exchange rates can potentially save you 0. Airport kiosks have the worst exchange rates, with extremely wide bid-ask spreads. It may be preferable to carry a small amount of foreign currency for your immediate needs and exchange bigger amounts at banks or dealers in the city. Some dealers will automatically improve the posted rate for larger amounts, but others may not do so unless you specifically request a rate improvement.

If the spread is too wide, consider taking your business to another dealer.

Wide spreads are the bane of the retail currency exchange market. A deal will be finalized when the forex dealer finds a trader willing to pay the asking price. Though the dealer would want to maximize his profit, setting the asking price high as possible, he will find it difficult to find a buyer for currency if the price is much higher than the market rate. Bid and ask price foreign exchange example Here are below bid, ask price, spread example:. The bid and the asking price are important for those who wish to deal in forex since they indicate the rates at which a transaction is likely to get finalized.

The bid price indicates the transaction cost that a person will incur if they purchase a currency and sell it immediately. The bid and ask price will also depend on the economy of the country, financial stability. In some countries, the inflation rates are high, and the currency value is decreasing rapidly.

Hence if they are investing in this currency, they will usually keep the asking price higher. The difference between the bid and the asking price for a particular currency pair is called the forex spread or bid-ask spread. It indicates the market liquidity, how easy or difficult it is for a seller to find a buyer willing to pay the price he requires.

When there is a lot of liquidity in the market, the spread will be low, and when there is less liquidity in the market, the spread will be higher.

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