Spot trading
Spot trading, spot contract is a term derived from the English word spot, which literally means "in sight". Spot market is a public financial market where transactions are executed instantly. After the agreement is reached between the seller and the buyer, the delivery takes place immediately, although the circumstances depend on the traded asset.
This is what differentiates spot trading from various types of futures contracts, for example, which are entered into at the current moment but are executed at a later date. Unlike the futures market, where the transaction may involve waiting for the asset to be made available to the seller, in spot trading, both parties must have the assets being exchanged on hand.
The price at which a spot transaction is executed is called the spot price.
Advantages of spot trading
- Simplicity and transparency of operations. Spot trading does not require any special qualifications from the user.
- The ability to trade in real-time.
- Predictable profitability of operations.
- Scalability of the operational horizon: from instant transactions to investments lasting decades.
- The ability to enter into long and/or short positions and trade with leverage.
Disadvantages of spot trading
- High entry threshold. Many transactions require a minimum lot size to enter into a contract.
- Mandatory availability of assets for purchase or sale. In the futures market, a contract can be entered into even if the buyer or seller does not currently have the corresponding volume of assets. In the spot market, they will have to be borrowed in such a situation.
- The volatility of the spot market is lower than that of the futures market.
- The profit obtained in spot trading is usually smaller than in the futures markets. However, the risks are also lower.