HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

Spread, swap, quotes and other scary words


How to make money in Forex? This is the most common question asked by all newcomers to the world of finance. If you’re serious about starting to trade on a stock exchange, but the incomprehensible words in the title confuse you, don’t panic: this article is for you.

The main source of income on stock exchanges is derived from the difference between the buying and selling price of various assets, be it currency, stocks, or precious metals. Put simply, the idea of exchange is to get the maximum profit from this difference. In practice, however, every newcomer faces a number of pitfalls. One needs to be well-versed in the specifics of exchange trading to avoid them.

Of course, there’s specialized terminology pertaining to Forex trading that requires professional translation from Financial to Human. We’ll guide you on a short journey into the theory of trading, to help you understand these complex concepts and turn your knowledge into profit. Fasten your seat belts and let’s go.

Spread


Spread is the difference between the most favorable prices for the seller and for the buyer. Spread can also be defined as a kind of commission charged by a brokerage firm.

Here’s an example: someone wants to buy Apple stock at $110 per share. If this price is the highest in the market, it is called a “bid price”. The seller lists the shares on a stock exchange at $115. If this price is the lowest in the market, it is called an “ask price”. The spread in this case is the difference between the bid and ask prices, namely $5.

In fact, this is a direct loss for the trader, but, anticipating your indignation, let us note that if you’re working with an honest broker, it should be compensated by the future profits. To achieve this, the stock price must rise by at least $5. That’s why the spread is one of the most important criteria to look at when choosing a brokerage company.

In the context of the interbank foreign exchange market, there are two types of spread: fixed and floating.

Swap


Another important concept in the world of finance is swap. A swap is a temporary exchange of any asset. The key word is temporary! Yes, you got that right, after a certain period, the transaction participants return the previously exchanged assets to each other. At first glance, this process may seem completely meaningless, but this is far from the case. Both parties in the swap process receive their own benefits: they increase the amount of assets, hedge risks or gain access to the markets in another jurisdiction with lower taxation.

A swap consists of 2 stages: the exchange of assets and, accordingly, the return of assets and the closing of the transaction. It’s important that at least one night must pass between the stages for the exchange to receive the status of a swap.

Types of swaps are very different from each other. Swaps can be:

What is a Forex swap?


A swap in Forex is the difference in interest rates on loans of two currencies when the transaction is carried over to the next day. It can be either positive or negative. In the case of a positive swap, the trader profits from the difference between the exchange rates or interest rates, as well as from the resale swaps to other traders.

If a trader opens a position and doesn’t close it on the same day, a minor deduction or increase in funds will appear the next morning. This is a swap. Funds are charged or granted by the broker depending on whether the trader is holding a long or a short position.

Consider an ordinary trade in the market. The trader sells the currency to the bank, and that’s the end of the transaction. While in the case of a currency swap, the bank resells the same amount of funds back to the trader after some time. Changes in the exchange rate and the difference in rates bring profit to one of the parties, and losses to the other.

The central bank sets the discount rate for the currency of each country. The difference between the rates can be quite significant (for example, the discount rate of ЈPY is several times less than that of USD). Turns out, when you buy USD with ЈPY, you get a currency (USD) with a higher interest rate, and in return you give another currency (JPY) with a lower interest rate.

In addition to profit from the difference in quotes (we’ll get back to it in a bit), making money on the swaps themselves is also an option. This strategy is known as Carry Trade and it’s popular in the banking sector. The trader buys a currency pair where the interest rate of the base currency is higher than that of the quoted currency, which guarantees a positive swap. If the exchange rate of the currency pair is stable over a long period, the trader makes a significant profit.

Quotes


According to Wikipedia, a financial quote is the current price of a financial asset, acceptable to both the seller and the buyer. An exchange rate, a stock price, an interest rate of a loan, a price of goods or raw materials can be referred to as a quote.

Quotes in the financial market are constantly changing. They are recorded by the quotation committee at the time of the opening and closing of the exchange, indicating the high and the low of each day. Quotes can be direct (price of one asset) and inverse (the amount of the asset that can be bought for a certain amount).

Quotes and their change are one of the main sources of income for traders. In Forex, traders use “currency pairs” due to the difference in the rates of different national currencies. All national currencies are priced in relation to the US dollar. The ratio of the currency of any country to the US dollar is a direct quote (EURUSD, GBPUSD, AUDUSD, etc.), and the ratio of the dollar to the currencies of other countries is an inverse quote (USDCHF, USDJPY, USDRUB, etc.). There are also so-called cross currency rates — the rates of national currencies to each other, but in such quotes, a preliminary conversion of the currency into the US dollar is carried out at the current rate. You can view the current quotes here.

What drives the currency pairs?


Forex is a decentralized unregulated system based on connections between its largest players, namely the banks, brokerage firms, various investment funds, and even central banks. They are the market makers that influence the formation of quotes in the foreign exchange market. Different Forex brokers offer different quotes, which affects the size of the spread and swap for each currency pair, as we mentioned before.

#source


RELATED

Why Trade Forex: All around Forex Trading

It is widely known that forex is the most traded market in the world so once someone understands its benefits, it will become easier to understand why they need to trade forex...

What trading animals do you find in the stock market?

We bet you watched Wolf of the Wall Street with Leonardo DiCaprio playing Jordan Belfort. Have you ever wondered why the main character was referred to as a wolf?

Strongest and Most Valuable Currencies in the Global Landscape

In the realm of international economics and trade, the strength and value of a currency play a vital role. A strong currency reflects the health of its nation's economy and its global economic stature...

How to start trading

Diving into any new industry, especially forex, requires planning. In this article, we’ll break down the process of how to start trading in 7 simple but critical steps...

How to Trade the Fed Rate Decision - Guide for 2022

The Fed funds rate is one of the most important benchmarks for investors and traders all over the world. Its adjustment significantly affects exchange rates and the economic situation of countries...

What Financial Markets Are and Why They are Important

When we talk about stocks, currencies, bonds and cryptocurrencies, we may not think that all of these assets relate to particular financial markets. And what is a financial market, anyway?

Octa broker: leveraging AI to revolutionise trading and investments

AI has already made a profound impact on the financial markets. Its ability to predict trends, execute trades swiftly, and manage risk is transforming investment strategies at its core.

What Is a Limit Order?

A limit order is an order that has a prespecified price to buy or sell a security. For example, if a trader is looking to purchase stock with a limit of $10.50, they will only buy the stock...

What Affects Forex Rates?

Currency exchange rates have always been a considerable factor used to determine a country's economic health and stability. This is typically defined as the rate at which one...

How to place your first trade in Forex?

Forex is a unique financial platform. It gives traders an opportunity for both incredible profit and equally incredible loss. Thousands of people every day decide...

Trending Stocks

Big tech, pharma, banks and other trending stocks are always a hot topic in the investment markets.Millions of investors flock to stocks like Apple or Amazon...

Bitcoin For Beginners: How To Get Started With Cryptocurrency

Bitcoin is the talk of the finance world once again, beating stocks, gold, oil, and more in ROI over the last decade and more of its history. But the cryptocurrency...

Top commodities to watch in 2024: gold, oil, and others

As we progress through 2024, the commodities market is emerging as a key area of interest for investors seeking to diversify their portfolios and hedge against inflation. With insights from Kar Yong Ang, a financial analyst at Octa broker, we explore the most promising commodities of the year, including gold, oil, lithium, and others, and provide strategies for traders to navigate these opportunities effectively.

What is Copy Trading and how does it work?

Are you interested in trading the financial markets but feel like you don’t have the time to learn new strategies? Maybe you already trade but can't find a way...

What should you know about cryptocurrencies?

eXcentral is expanding the number of assets and markets available for traders to invest in every month. One of the highest growing markets, if not the highest...

The Past, Present and Future of Trading Success

Let's have a look at some basic needs to find out our story. Let your mind go back to the past, remember that first day when you decided to make your first trade...

Invaluable Tips on How to Choose the Best Forex Broker for Beginners in 2022

Why do people want to start trading foreign currencies on the global market that is commonly known as Forex? Some are tired of their mundane jobs where they get paid peanuts...

MT4 Web Trading to trade Forex directly from your browser

The MetaTrader 4 (MT4) trading platform offers almost everything a trader needs for forex trading. Its powerful trading and analysis tools are what have earned the platform...

A Comprehensive Guide to Initiating Your Journey in Trading

The allure of financial markets is undeniable. In light of the digital revolution and the global shifts caused by the COVID-19 pandemic...

Is CFD trading a better option in 2022/23?

It wasn’t so long ago that only the elite and wealthy had access to the global markets. Back then, a traditional trading account would require a deposit of at least...

FP Markets information and reviews
FP Markets
81%
RoboForex information and reviews
RoboForex
77%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.