Spread and Leverage Explained Simply

Every trade you open has an entry cost called the spread, and a size multiplier called leverage. Understand these two and you know exactly what you pay and how much you risk; ignore them and the numbers will surprise you.

The spread: the gap between two prices

Every instrument has two prices at the same moment:

Bid, the price you sell at.
Ask, the price you buy at, always the higher one.

The spread is the difference, measured in pips. If EURUSD shows 1.1500/1.1501, the spread is one pip. That is why every position opens slightly in the red: you bought at 1.1501 while the immediate sell price is 1.1500, you only turn profitable once the move exceeds your entry cost.

What that cost is worth in dollars follows your position size: a one-pip spread costs $1 on a mini lot and $10 on a standard lot, see pip value explained. Spreads come in two kinds: floating, which narrows and widens with market liquidity, and fixed within an account plan. Floating spreads can widen sharply around big news and market opens.

Leverage: a bigger size for a smaller margin

Leverage lets you open a position larger than your balance by reserving a small slice of it, called margin:

Required margin = position value ÷ leverage

Example at 1:100: a 0.10-lot EURUSD position (worth about 10,000 euros) reserves only around 100 euros of margin.

The essential point: leverage does not change pip value. Profit and loss are computed on the full position size (10,000 units), not on the reserved margin. That is why your result moves fast relative to your balance, equally in both directions.

One example, both concepts together

Your balance is $500. You open 0.10 lots of EURUSD at 1:100 leverage (margin ≈ $115, pip value $1):

You paid the spread on entry: one pip = one dollar.
Price moves 60 pips your way: +$59 net (about 12% of your balance).
Price moves 60 pips against you: −$61 (also about 12% of your balance).

A perfectly ordinary daily move shifted your balance by twelve percent. That is leverage: an amplifier of outcomes, not a maker of profits.

Practical rules

Available leverage is a ceiling, not a target: you can always trade far smaller than it allows.
Watch your platform's margin level; if it falls too far, positions face forced closure at your account's published levels.
Set a stop loss before entering, and size the trade from your accepted loss, not from the maximum margin allows.
Count the spread into your plan, especially if you trade often on short moves.

In short

The spread is your entry cost: the bid–ask gap, paid on every trade.
Leverage buys size with less margin and scales profit and loss identically.
Pip value follows the full position size, not the margin.
Position sizing and stop losses are what turn leverage into a tool instead of a blind risk.

Each account type's spreads and margin levels are published in the trading conditions; try them hands-on in a demo account, and read the full risk disclosure.