Spot Trading: A Guide to Real-Time Asset Exchange
Spot Trading: Buying and Selling Assets for Instant Delivery
Spot trade (or spot trading) is nothing new to the world since crypto was invented in 2008. In fact, it is quite common in the conventional markets where traders of long ago were utilizing this interesting form of value exchange.
The following article is geared towards diving into what a spot trade is and how crypto investors can capitalize on it. A good way to remember the term long after you read this article, is by relating it to a common phrase such as, “Putting you on the spot”. When you think of that phrase, you will remember what a spot trade is in a moment’s notice when someone “puts you on the spot”.
What Is a Spot Trade?
Spot trade, as the name implies, is a short-term payment at the current market rate, typically executed in 72 hours or less. A synonym for spot in this case is the word “cash” or “liquid”. In order to conduct a spot trade, there must be a buyer and a seller present (or on the same exchange).
Both the buyer and the seller can put out an order to buy or sell a particular asset. During this process, they have the option to take an order from other market contributors. In essence, a spot trade is a quick deal done between 2 parties to reach a desired outcome.
Learn why people trade spot (cash) markets
People trade spot (cash) assets on spot markets because it's simple. As stated above, a spot trade involves one seller and one buyer, each entering a trade to achieve a desired outcome in a short period of time.
Spot trading is simple and doesn’t take much thought to execute. One person desires to sell some or all of their assets, while the other person wants to buy it for a good price. Spot trades are typically mutually beneficial, meaning that both parties walk away from the trade in good spirits and happy with the resulting exchange.
Spot markets are great for quick trades, as spot prices offer real-time pricing and access to some of the lowest spreads with no fixed expiration dates. These benefits and more are reasons why people go with spot trading.
Pick a spot market to trade
We discovered what a spot trade is and why people desire to trade in that manner. Now it is time to pick a spot market to trade on. We are dealing with crypto spot markets, not with Forex, Commodities, or Indices. Since a spot trade is one of the most simplistic forms of crypto trading, and trading in general, any exchange you decide to sign up with will offer spot trading.
Examples of centralized exchanges, or CEXs, are: Coinbase, Binance, and Kraken. Some examples of decentralized exchanges, or DEXs, are: SushiSwap, PancakeSwap, and BitGlobal. Any of these exchanges, and many more, offer spot trading as a basic trading service.
Does it matter which one you choose? Kind of, but not really. If you want to stay KYC compliant and have your transactions tracked by governing bodies, then a centralized exchange is for you. If you want to fly more under the radar and stay a bit more private, then decentralized exchanges would be your jam.
Create a spot trading account and log in
In order to participate in a spot trade, an individual must create a spot trading account and log in. As stated previously, choosing an online exchange, either centralized or decentralized, is the way to create an account and then log into that account once it’s created.
Many centralized exchanges will ask you to create a unique username and password, then verify that username via email. Once you log into that account, further account verification methods are suggested in order to gain access to larger account withdrawals and higher trade amounts.
Decentralized exchanges typically offer a shorter sign-up process which is great, but the downside is that they usually don’t offer as many trading services as centralized exchanges do. But that is not always the case. Decentralized exchanges are becoming more and more robust as the years and innovation progress.
Find your spot trading opportunity
Finding your cryptocurrency spot trade (spot trading) opportunity is rather easy, even if you just signed up for an exchange account and are brand new to the industry. If you go into the spot trade section of the exchange, be sure to click on the asset that you desire to buy or sell for another which is called a “trading pair”.
For example, if you want to sell your USD and acquire BTC, then you would choose the USD/BTC pair on the exchange. If you wanted to purchase ETH and sell your LTC, you would choose the ETH/LTC pair. Centralized exchanges such as Coinbase and Binance simplify this even more with a friendly user-interface on top of the robust trading mechanism.
Identify a price that you would be happy paying (or being paid) for a particular asset and set that as your price. Again, a spot trade executes quickly, so whichever price you choose to set your asset buy/sell price, that is what it will trade at within a matter of minutes typically.
Decide whether to go long or short
Going long or going short are terms you may be aware of, as they are not new to the crypto space. Long and short are traditional finance words that have 2 different meanings. When someone decides to short an asset, that means that they see the value going down and want to sell it before it goes down any further, usually picking it back up for a lower cost.
Going long means that you are buying at a specified price with the expectation of it increasing in value with the intention of holding for weeks or months at a time.
At the time of setting up a spot trade, decide if you would like to short an asset or long an asset. The great thing about automated trading apps like Stoic AI is that you don’t have to time the market or make these kinds of decisions. The AI-based strategy does that for you 24 hours a day, 7 days per week.
Set your stops/limits and place your trade
Setting stops, or limits, are a more advanced way to spot trade. Setting a stop, or a limit, means that you are telling the exchange that the asset cannot dip below a specified price before the trade executes.
Setting up stops are good to protect yourself from losing money that you’d rather not lose. Again, options like this are typically unavailable in simplified exchange versions such as Coinbase. On the flip side, Coinbase does indeed offer an advanced trading section where these options are available.
Placing a trade with a stop (limit) ensures that your asset sale works out in your favor, without you getting the short end of the stick so to speak.
Monitor and close your position
If you are placing a trade manually (which you don’t have to do with apps like Stoic AI), then you need to closely monitor and close your chosen asset position. A spot trade that is set without stops especially needs to be watched to ensure that it executes properly.
Many people though do not have this kind of time, especially if they have a full-time job, a family, and other adult responsibilities. Taking advantage of automated crypto trading is a much better use of energy, and it only takes a moment to set up.
Forward pricing refers to the price for any crypto asset that ends up resolving later than the spot trade. This price typically syndicates the spot price and the interest cost up until the clearing date. Forward pricing rarely occurs in a spot trade, but it could happen at some point throughout your crypto trading journey.
It is important to be prepared for any situation that comes your way. Reading articles like this ahead of time will help set you up for success which then breeds more success. Forward pricing can occur occasionally so keep that in mind when trading manually.
What is spot buying?
Spot buying occurs as a purchase that wasn’t on the schedule, or in your plan for your trading day. A spot buy is typically considered a “once-in-a-while” or single-time buy. This type of trading is sometimes a necessity when buyers need to buy something in a timely manner without too much friction involved.
Types of spot market transactions
There are several types of spot market transactions, depending on the assets being traded. Some common types include:
Spot Currency Market: Also known as the Forex (foreign exchange) market, this is where currencies are bought and sold at the current exchange rate for immediate delivery. It is one of the most significant and liquid financial markets globally.
Spot Commodity Market: In this market, commodities like gold, silver, crude oil, natural gas, agricultural products, and other raw materials are traded for immediate delivery.
Spot Stock Market: While most stock market transactions involve a settlement period of a few days, some stock exchanges offer same-day settlement for certain stocks, enabling spot trading of those stocks.
Spot Precious Metals Market: This market involves the buying and selling of precious metals like gold, silver, platinum, and palladium for immediate delivery.
Spot Energy Market: This includes the immediate buying and selling of electricity and other energy products to meet immediate demand.
Spot Bond Market: In certain cases, bonds and other fixed-income securities can be traded on a spot basis for immediate settlement.
Spot Derivatives Market: While most derivatives involve contracts with future or forward settlement dates, some derivatives, like spot options, can be settled immediately.
Spot Cryptocurrency Market: Cryptocurrencies like Bitcoin, Ethereum, and others are traded in spot markets, where buyers and sellers exchange the digital assets for immediate settlement.
It's important to understand that spot market transactions differ from futures and forward contracts, where the delivery and settlement occur at a specified future date. In spot transactions, the asset is transferred immediately, and the payment is made upon completion of the transaction.
Types of spot market contracts
Various types of spot market contracts exist, depending on the assets or commodities being traded. Some common types include:
Spot Currency Contracts: These involve the exchange of one currency for another at the prevailing exchange rate, with settlement typically taking place within two business days.
Spot Commodity Contracts: In these contracts, commodities like oil, gold, silver, agricultural products, etc., are bought and sold for immediate delivery and payment.
Spot Equity Contracts: Also known as "spot stock" or "cash stock" contracts, these involve the immediate purchase or sale of company shares at the current market price.
Spot Precious Metals Contracts: These involve the immediate purchase or sale of precious metals like gold, silver, platinum, or palladium at the prevailing market prices.
Spot Energy Contracts: These contracts involve the immediate purchase or sale of energy commodities, such as natural gas, crude oil, or electricity.
Spot Interest Rate Contracts: In these contracts, the exchange of interest payments on loans or bonds happens at current market interest rates.
Spot Agricultural Contracts: These involve the immediate purchase or sale of agricultural products, such as grains, cotton, coffee, etc.
Spot Freight Contracts: Involves the immediate buying or selling of shipping services for the transportation of goods.
Spot vs derivatives markets
The spot market is focused on immediate transactions of physical or financial assets, while the derivatives market deals with contracts based on future transactions derived from underlying assets, often used for hedging and speculation. Both markets serve essential roles in the global financial system and offer different opportunities and risks to investors and traders.
Advantages of the spot market
Here are some of the advantages of the spot market:
Immediate transactions: Spot market transactions are settled almost instantly, typically within two business days. This immediate exchange allows for quick access to assets or commodities, providing liquidity and flexibility to both buyers and sellers.
Price transparency: Spot markets are known for their high level of price transparency. Prices are determined by supply and demand factors in real-time, making it easier for market participants to assess fair market value.
No long-term commitment: Participants in the spot market are not tied to long-term contracts or obligations. They can choose to participate as needed without the need for continuous engagement, giving them more flexibility in managing their positions and risk exposure.
Risk management: Spot markets can be used for risk management purposes. For example, commodity producers can use the spot market to hedge against price fluctuations by selling their products at the current market price, ensuring a predictable revenue stream.
Market efficiency: The spot market is generally considered more efficient than other markets, such as futures or options markets, as it allows for the quick and straightforward exchange of assets. This efficiency can lead to reduced transaction costs and improved overall market functioning.
Accessible to small players: Spot markets are often accessible to a wide range of participants, including small businesses and individual investors. This inclusivity allows for broader market participation and greater market depth.
Price discovery: Spot markets play a crucial role in determining fair market prices for assets and commodities. The interaction of supply and demand in the spot market helps establish benchmark prices that can influence other related markets and financial instruments.
Flexibility in trading strategies: Traders and investors can employ various strategies in the spot market, such as day trading, swing trading, or position trading. The availability of immediate settlement and liquidity allows for the implementation of different trading approaches.
No counterparty risk: In the spot market, there is no counterparty risk since transactions are executed immediately, and there is no reliance on counterparties to fulfill obligations over extended periods.
Disadvantages of the spot market
The spot market has several disadvantages, which can pose challenges to businesses and individuals who rely on it for buying or selling goods and services. Some of these disadvantages include:
Price volatility: Spot market prices can be highly volatile and subject to sudden fluctuations. This unpredictability can create uncertainty for buyers and sellers, making it challenging to plan and budget effectively.
Lack of long-term price stability: In contrast to futures or forward contracts, spot market prices are determined by current supply and demand conditions. This absence of long-term price stability can be a disadvantage for businesses that require stable prices to ensure profitability and financial planning.
Limited hedging options: Hedging is a risk management strategy used to protect against adverse price movements. In the spot market, hedging options are limited compared to futures or forward contracts, making it harder for businesses to manage price risks effectively.
Limited availability and access: The spot market may not be available for all goods and services, especially in certain regions or industries. Additionally, accessing the spot market might be challenging for smaller businesses or new entrants due to various barriers to entry.
Short-term focus: The spot market typically operates on short-term transactions, and this can hinder long-term planning and investments. It may not be suitable for businesses that require stable pricing and longer-term supply arrangements.
Market power and manipulation: In some cases, larger players with significant market power can influence spot market prices, making it less fair and competitive for other participants. This can lead to market manipulation and disadvantage smaller businesses or individuals.
Lack of customization: Spot market transactions are usually standardized, providing limited room for customization. For businesses with specific requirements, this can be a disadvantage as they might not find precisely what they need in the spot market.
Transaction costs: Engaging in spot market transactions can incur higher transaction costs due to the need for immediate delivery and settlement. These costs can add up and affect overall profitability.
Counterparty risk: When dealing with the spot market, there is a risk of default by the other party involved in the transaction. This risk can be mitigated through proper due diligence, but it remains a concern, especially with unknown or unreliable counterparties.
What is the derivatives market?
The derivatives market is a financial market where financial instruments, known as derivatives, are bought and sold. These derivatives get their value from underlying assets, which can include commodities, stocks, bonds, currencies, interest rates, and more. The primary purpose of the derivatives market is to enable participants to manage risk, speculate on price movements, and engage in hedging activities.
Derivatives are financial contracts that derive their value from the performance of an underlying asset or group of assets. Some common types of derivatives include futures contracts, options contracts, and swaps.
Trading derivatives refer to financial instruments whose value is derived from an underlying asset, such as stocks, commodities, currencies, or bonds. These instruments allow investors to speculate on price movements, hedge risk, and gain exposure to various markets without owning the underlying assets directly.
Traders in derivatives markets seek to profit from price fluctuations, leveraging their positions and utilizing sophisticated trading strategies. However, derivative trading also carries higher risks compared to traditional investments, as prices can be highly volatile, leading to significant gains or losses. Due to the complexity of derivatives, it is crucial for traders to possess a deep understanding of the markets and underlying assets.
Overall, trading derivatives can offer opportunities for diversification, risk management, and potential profit, but it requires skill, knowledge, and caution to navigate successfully. As with any investment activity, it is essential for traders to conduct thorough research, understand the risks involved, and consider seeking professional advice before engaging in derivative trading.
Financial risks of derivatives
While they offer potential benefits like hedging and speculation, they also expose participants to several risks. Here's a summary of the main financial risks of derivatives:
Market Risk: The most common risk is market risk, also known as price risk. This refers to the potential losses arising from changes in the underlying asset's price, index, or benchmark. Market risk is prevalent in derivatives like options, futures, and swaps, as their value depends on the price movements of the underlying assets.
Credit Risk: Credit risk arises when one party involved in the derivative contract fails to meet its obligations. This could lead to financial losses for the counterparty. Credit risk is particularly significant in over-the-counter (OTC) derivatives, where there's no central clearinghouse to guarantee trades.
Counterparty Risk: This is the risk that the counterparty in a derivative transaction defaults or becomes insolvent before fulfilling its contractual obligations. Counterparty risk can be reduced by trading on organized exchanges with centralized clearinghouses or by using collateral and credit enhancement mechanisms.
Liquidity Risk: Liquidity risk refers to the possibility of not being able to buy or sell a derivative instrument quickly at a fair price. Some derivatives may have low trading volumes or limited participants, making them illiquid and potentially leading to higher transaction costs.
Operational Risk: This risk stems from errors or failures in operational processes, systems, or personnel involved in managing derivatives. An operational failure could lead to financial losses or damage an institution's reputation.
Legal and Regulatory Risk: Derivative contracts are subject to legal and regulatory frameworks that vary across jurisdictions. Changes in regulations or disputes over contract terms can result in financial losses or compliance challenges.
Basis Risk: Basis risk occurs when the correlation between the derivative and its underlying asset weakens, leading to discrepancies in price movements. This can happen in certain types of derivatives, such as commodity futures, where the delivery terms may not precisely match the spot market conditions.
Model Risk: The valuation and risk management of derivatives often rely on mathematical models. Model risk arises when these models fail to accurately represent market behavior or underlying risks, leading to incorrect pricing, or hedging strategies.
Derivatives can offer valuable tools for managing risks and generating returns. However, it is crucial for participants to understand and carefully manage these financial risks to avoid unexpected losses and maintain a stable financial position.
Professional advice and risk assessment are essential when dealing with derivatives, given their complexity and potential impact on portfolios and financial institutions.
Spot Trade Video if doing it manually
Spot trading is a great way to get ahead and grow your portfolio. Spot trading is quick, efficient, and timely. Many traders, new and seasoned, use spot trading to this day. Exploring this avenue is a good way to learn more about the financial industry and how it functions.
Not for you? It’s ok, no one has to be an expert. Instead, feel free to rely on our AI-powered crypto trading bot, Stoic AI. Allow our algorithms to trade for you, 24/7, so that you can focus on living your life.
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Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.