Understanding the difference between Swap and Spread in Forex

By: Damian Okonkwo

What is spread？

The term spread used in forex refers to the difference between the broker's offering prices and the actual market price of the financial instrument they offer to their clients. Spread is the extra costs added to the prices of various financial instruments traded in the market by the broker while offering it to their clients which serves as his commission for services rendered. We can further define spreads as the difference between the bid and ask prices of the various financial instruments traded in the forex market today.

What is swap？

Swap is the cost of holding overnight positions in the market. Usually, some brokers place an additional cost on the trader's position when he leaves his position open at the close of each market day. The swap charges could be positive or negative depending on the interest rate for the currency pair traded.

Major difference between Swap and Spread

How do swaps and spreads affect the trader's position in forex？

Generally, both the spread and swap affect the trader's position negatively. Only on a few occasions does the swap come as positive. Aside from these rare occasions, both the spread and swap are known to reduce the trader's profits and available margin for trading.