Currencies are traded in pairs and exchanged against each other. The majority of currencies are traded against US Dollar. The first currency in the exchange pair is called Base Currency and the second currency is called the Counter Currency or Quote Currency.
The exchange rate tells you how much of the counter currency must be paid to buy one unit of the base currency. The exchange rate also tells the seller how much is received in the counter currency when selling one base unit. For example, an exchange rate for EUR/USD of 1.2083 specifies to the buyer of Euros that 1.2083 USD must be paid for one Euro.
Spread is the difference between the buy and sell price. Like in stock market ask and bid. This is the difference between the market makers selling price and the price the market maker is ready to pay to buy the same currency. This means that if you buy a currency and then sell the currency before the price has changed you will lose money because of the spread. Bid price is always lower than the ask price, thus the situation. For example if EUR/USD bid/ask is 1.2010/1.2015 then by selling the security before the price has changed, you will lose 5 pips.
Now you might be wondering what the heck the pip is. I know that when I first started reading about forex and such I wondered for quite a bit what is that pip they are talking about. Basically, as currency rates do not change a lot then the changes are brought out in pips. One pip is 0.0001 in case of all the currencies excluding Yen. For Japanese Yen one pip is 0.01. So if the exchange rate changes by 20 pips then now you’ll know it means 0.0020.
When in banks the exchange rates – buy/sell rates (spread) for different currencies may vary even more than 1000 pips, in forex market it’s a lot smaller and because of that investors may profit even from only small price movements.
The exchange rate tells you how much of the counter currency must be paid to buy one unit of the base currency. The exchange rate also tells the seller how much is received in the counter currency when selling one base unit. For example, an exchange rate for EUR/USD of 1.2083 specifies to the buyer of Euros that 1.2083 USD must be paid for one Euro.
Spread is the difference between the buy and sell price. Like in stock market ask and bid. This is the difference between the market makers selling price and the price the market maker is ready to pay to buy the same currency. This means that if you buy a currency and then sell the currency before the price has changed you will lose money because of the spread. Bid price is always lower than the ask price, thus the situation. For example if EUR/USD bid/ask is 1.2010/1.2015 then by selling the security before the price has changed, you will lose 5 pips.
Now you might be wondering what the heck the pip is. I know that when I first started reading about forex and such I wondered for quite a bit what is that pip they are talking about. Basically, as currency rates do not change a lot then the changes are brought out in pips. One pip is 0.0001 in case of all the currencies excluding Yen. For Japanese Yen one pip is 0.01. So if the exchange rate changes by 20 pips then now you’ll know it means 0.0020.
When in banks the exchange rates – buy/sell rates (spread) for different currencies may vary even more than 1000 pips, in forex market it’s a lot smaller and because of that investors may profit even from only small price movements.
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