What Is a Spread Only Account and How Does It Work?

This type of account distinguishes itself by its unique fee structure, where the broker’s compensation is integrated directly into the pricing of the financial instrument being traded. It offers a straightforward approach to trading costs, often appealing to individuals seeking clarity in their transaction expenses. This model is prevalent in markets where rapid price movements occur, and transaction costs are a constant consideration for participants.

The Spread Only Account Model

In a spread-only account, the broker earns revenue from the “spread.” The spread is the difference between the bid price and the ask price of a financial instrument. The bid price is the maximum price a buyer is willing to pay for an asset, while the ask price is the minimum price a seller is willing to accept. This difference represents the transaction cost embedded within the trade itself.

This model contrasts with commission-based accounts, which typically charge a separate fee for each trade executed. The broker effectively incorporates their service charge by quoting a slightly lower price for selling (bid) and a slightly higher price for buying (ask) than the actual market price. This difference becomes the broker’s earning for facilitating the trade.

When a trader initiates a position, the cost of the spread is immediately reflected in the trade’s opening value. For example, if a trader buys an asset at the ask price and then immediately sells it at the bid price, the difference between these two prices is the spread, representing an immediate cost.

Applying Spreads in Trading

Spreads are measured using specific units depending on the financial instrument. For currency pairs in the foreign exchange (forex) market, spreads are typically measured in “pips”. A pip, or “percentage in point,” is the smallest standardized price increment a currency quote can move. For most currency pairs, one pip is equivalent to 0.0001, representing the fourth decimal place, while for Japanese Yen pairs, it is the second decimal place (0.01).

For other assets, such as Contracts for Difference (CFDs) on indices or commodities, price movements and spreads might be measured in “points”. A point generally refers to a whole number price change, often to the left of the decimal point, differing from the fractional movements of pips. The spread is applied when a trade is opened, meaning the initial position will show a small immediate loss equivalent to the spread before any market movement can generate a profit. This requires the market price to move favorably beyond the spread’s value for the trade to become profitable.

The value of spreads can fluctuate significantly based on various market conditions. Market liquidity plays a substantial role; highly liquid assets, which have many buyers and sellers, generally exhibit narrower spreads due to increased competition. Conversely, less liquid assets or less popular currency pairs may have wider spreads because there are fewer participants to facilitate trades. Volatility also influences spreads, as periods of high market volatility often lead to wider spreads, reflecting increased risk for market makers who adjust their pricing to account for rapid price changes. Trading volume and the specific trading session can also affect spread values, with higher activity generally leading to tighter spreads.

Instruments and Features of Spread Only Accounts

Spread-only accounts are commonly used for trading a range of financial instruments. Foreign exchange (Forex) pairs are a primary example, where traders speculate on the exchange rate movements between two currencies. Contracts for Difference (CFDs) also frequently utilize this account model, allowing traders to speculate on price movements of underlying assets without owning them. These underlying assets can include major global indices, commodities like gold or oil, and individual stocks.

Another feature often associated with spread-only accounts is the potential for leverage, which allows traders to control larger positions with a relatively smaller amount of capital. While leverage can amplify potential gains, it also increases potential losses.

Trading platforms commonly linked with spread-only accounts include widely recognized systems like MetaTrader 4 (MT4) and MetaTrader 5 (MT5), as well as proprietary web and mobile applications offered by brokers. These platforms provide tools for analyzing markets, executing trades, and managing positions. Brokers offering spread-only accounts often emphasize transparent pricing, as the cost is directly visible in the bid and ask quotes.