A spot market is a financial market in which public assets are traded immediately. The process goes forth in the following way. The buyer purchases an asset with fiat or another medium of exchanges following the delivery of the asset that usually takes place immediately. Traders make the payments upfront, therefore; spot markets are also known as cash markets. When using the cash markets for trading you can only make exchanges with the assets you own, there is no leverage or margin.
What is Spot Trading?
Spot traders look to make a profit from this market by purchasing assets and hoping they rise in value. They often sell their assets once the price rises and, in this way, can make an income. Spot traders also use short markets. Short markets involve selling financial assets and repurchasing when the value goes down.
Spot price refers to the current market price of an asset. By using a market order on an exchange, you are able to purchase and sell immediately at the best available price. There is a chance that the market price will increase or decrease while the transaction is taking place. Spot prices are updated in real-time.
Depending on the asset delivery times can vary. It is typically immediate delivery or within T + 2 days. This refers to the trade date plus two business days.
Advantages of spot markets:
- Prices in the spot market are transparent and rely on the supply and demand of that specific market. This is seen as a big advantage in that future markets often include multiple reference prices.
- Spot trading is simple and straightforward, not including various rules, rewards, or risks. When investing a certain amount, you are able to calculate the risks easily with the information at hand.
- With spot trading, there’s no risk of being liquidated or getting a margin call. You can set and have peace of mind, no need to check in every now and then unless you want to make short-term trades. You are able to enter exit trades when you desire.
Disadvantages of spot markets:
- Potential gains in the spot market are at a lower percentage than they are in future and marginal trading.
- By relying on the spot market budgeting and revenue can be highly volatile.
- Spot markets can leave you with assets that are difficult to hold depending on what you’re trading. By spot purchasing crude oil, for example, would involve physical delivery of the asset. When it comes to cryptocurrencies, having tokens and coins entails a responsibility to keep them secure and safe. You can still obtain exposure to these assets by trading futures derivatives, but you must settle with cash.
Spot markets have become a common way of trading, especially for beginners. Although it can seem very simple it’s good to have some basic knowledge of its advantages and disadvantages.
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