What is a pip, spread and quotation?

What is a pip?

spread

In the world of finance, a pip is a unit of change or quotation in an exchange rate for a currency pair. It stands for « Percentage in point » or « Price interest point », depending on whom you ask.

In any case, a pip is a different and variable percentage for every pair, and depends on the currency chosen for the exchange rate and on the number of decimals in the quotation. It is usually the fourth decimal point except with the Yen which does not have cents hence decimal points.

Example: For the EUR/USD pair, the smallest possible change is 0.0001. If the EUR/USD pair rises from 1.3278 to 1.3279, the price increases by 1 pip.

Several trading platforms have improved their accuracy for most major pairs by one additional decimal point, and rates are displayed in tenths of a pip.

What is the spread?

The spread is the difference between two rates. On the Forex, it is called the « bid/ask spread », the difference between the two prices. The ask price is the price at which you can buy the financial product, and the bid price is the price at which you can sell it. The spread is represented in pips.

For example, if the ask price on the EUR/USD pair is 1.5763 and the bid price is 1.5761, the spread is 0.0002, in other words, 2 pips. The spread quantifies how liquid the market is. The closer to zero it is, the easier it is to buy and sell.

In effect the spread is usually the commission the broker will get paid. This difference in price constitutes at least part of the earnings of the broker. The level of the spread varies from one broker to another and is used as a selling point by brokers trying to outdo the competition. As investing on the Forex is currently extremely competitive, brokers’ spreads are increasingly low.

What is a quotation?

On the Stock Exchange, a quotation is an operation allowing a financial security to enter the market. It does so by quantifying the market value of a security issued by a company. This value is based on supply and demand. It represents the price at which the largest number of securities can be traded at a given moment. Thus a security is assigned a certain price when it enters the market, which can then change according to the rules of supply and demand.

On the Forex, a « quotation » is the rate at which a currency can be traded for another at a given moment in time.

So when the quotation for the EUR/USD pair is 1.3279, this means « 1 Euro equals 1.3278 US Dollars ». The quotation is always given in the same order (the rate of the base currency in the counterpart currency).

A difference in quotation is given in pips.

Quotations usually take place during market opening hours at the global Stock Exchanges.

 

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Last Update on 15/12/17

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