A buyer and seller meeting in the market
You may be used to seeing one exchange rate for each currency pair but did you know that each currency pair actually has two corresponding rates?
Two prices?! Yes, that is right.
The first is the lowest rate that someone in the market is willing to sell you the currency. This is the ask rate.
The second is the highest rate that someone is willing to buy the currency from you. This is the bid rate.
Why is there not one price? This is because if the buyer and the seller were willing to deal at the same price, they would transact with each other until one of them had no more to buy or sell and again there would have to be two prices to represent the highest bid and the lowest offer.
The mid market rate is average of the bid and ask rates and is not a rate that you can deal at. When you see an exchange rate that is quoted as a single number, it is usually the mid market rate. This is quoted to give an indication of the level that a currency pair is trading at. The bid and ask prices will be either side of the mid market rate.
Visualisation of Bid, Mid and Ask prices
The last price is the price at which the last trade occurred. The last price does not always reflect the price you can obtain because the bid and ask may have moved since that trade took place.
Major currencies, i.e. the most highly traded currencies, generally have bid and ask prices that differ in their fifth significant figure only (referred to as a pip).
For example, a GBP/USD quote may have a bid rate of 1.4123, and an ask rate of 1.4125. This is a difference of 0.0002 (or 2 pips) or 0.014%.
The difference between the bid and ask rates is referred to as the spread; and so in the example above, the spread would be 2 pips or 0.014%.
Currency pairs with a large amount of trading volume are said to be more liquid and have smaller spreads. Less liquid pairs that do not trade so much will have a larger difference between the bid and ask prices and therefore have a larger spread.
When you deal through Moneydero you receive a trade confirm that clearly shows you the bid or ask rate that you transacted at.
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