Difference between fixed and variable spreads
The Difference Between Fixed and Variable Spreads
When looking to choose an online broker, there are many important factors to consider. Trading costs, regulation, trading technology, reputation, customer support etc. but one important factor that is quite often overlooked or misunderstood is that of spread.
We know that the spread is the difference between the BID and OFFER price, and that the closer the spread, or tighter the spread, the cheaper it is to trade. The wider the spread, the more expensive it is to trade. If Broker A offers a price of 6,000 – 6,001 on the ASX 200 Index and Broker B offers 6,000 – 6,003 on the same market, then Broker A is cheaper as their spread is only 1pt whereas Broker B’s spread is 3pts.
There are two types of spread a broker will offer you; Fixed and Variable – and both have their own distinct advantages although for us, we much prefer fixed spreads.
Fixed Spreads
As the name suggests, fixed spreads remain constant throughout the day regardless of market conditions.
This means that your spread trading costs remain the same, even when there is volatility in the market. This is a major advantage over variable spreads, which widen (become more expensive) during periods of volatility.
For instance, Broker A offer fixed spreads and you can trade the ASX 200 Index with a price of 6,000 – 6,001 (so a spread of 1 point). Broker B, however, may offer a price of 6,000 – 6,001 in quiet times but say volatility picks up, they may increase that price to 6,000 – 6,005, i.e. a spread of 5 points!
Main Benefits of Fixed Spreads
- Consistency: many people’s trading strategy relies on consistent spread costs. Fixed spreads allow you to plan your transaction costs much more effectively.
- Typically lower trading costs: fixed spreads will usually save you money (trading costs). This is because you will know the cost before you enter a trade, unlike variable spreads which are more of an unknown.
- Better value in times of volatility: when the markets are moving around violently, broker’s with variable spreads will widen their spreads, which will cost you more to open/ close a trade. Fixed spreads are perfect during time of volatility as you’ll know how much you’re going to need to pay to enter a trade.
- Greater transparency: you’ll know exactly how much you’re going to pay each time you trade – no surprises!
Variable Spreads
Unlike fixed spreads, variable spreads do not remain the same. They constantly change throughout the trading day, depending on market conditions, news announcements etc. Variable spreads can often be cheaper than fixed spreads, especially during quiet market times. However, they can widen very quickly in times of extreme volatility.
Many brokers offer variable spreads. Our general advice would be to open a demo account with some of these brokers and see what spreads you actually get. Beware though, there is a general marketing ploy by many variable spread brokers that promotes “spreads from 0.2 pips” or “the lowest spreads in Australia” – yes, their spreads may start at 0.2 pips but do traders actually every get spreads that low? Probably never.
Conclusion
We might be biased but we believe that fixed spreads offer far greater transparency and value for traders. So, if you’re looking for a broker, find one that offers fixed spreads is our general advice.
To many traders, variable spreads = uncertainty and typically higher spread charges. So don’t let wide, variable spreads eat into your trading profits, find a broker that offers fixed spreads like TD365.com.
Preferred CFD Broker
TD365 Best Low-Cost CFD Provider
TD365.com – one of, if not, the world’s best value CFD provider.
- Tight, Fixed Spreads 24/5: TD365 offer some of the lowest spreads going – 0.9pt on the ASX 200 Index, just 0.8 pips on the AUD/USD, EUR/USD & USD/JPY with no added commission, stock trading starts at just $5. Unlikely they will be beaten.
- Easy-To-Use Trading Platforms: use MT4 or their in-house CFD trade platform, CloudTrade. Both are intuitive, effective, fast and user-friendly
- Expert Knowledge, Reliable Support: professional, friendly support with 24/5 trade desk hours and 9am-5pm live chat functionality
- Up to $2,500 Trading Rebate: open an account and get up to $2,500 rebate in your first month of trading. T&Cs apply.
- Free One-Click Demo: no need to give them all your details – sign-up in 1min and access their demo trade platform