“Spot trading” or “spot markets” are probably terms you’ve seen thrown around. And you know what? It’s okay to not be exactly sure what this jargon actually means. Let’s go ahead and spell it out.
Spot trading is…trading. It is, in fact, one of the two most common types of trading, with the other being futures trading.
Quickly comparing these two primary methods is useful as we’ll cut straight to the heart of the term “spot.”
Markets where financial assets are bought and sold, immediately, are given a distinction. They are known as spot markets. Here, assets – stocks, bonds, commodities, currencies and, yes, even cryptocurrencies – trade among counter-parties with a mutual expectation for immediate delivery i.e. money changes hands on the spot.
Futures and options contracts, by way of contrast, are based on the delivery of the underlying asset at a future date.
One of the biggest, best known spot markets is the New York Stock Exchange. Its listings’ spot prices are tracked second by second. Although the NYSE also offers options trading, a method by which investors, via contract, obtain the right, but not the obligation, to buy or sell a call or a put option at a set strike price prior to the contract’s expiry date.
Spot markets are inherently way less complex, and a relatively much more common means of buying and selling.
The “spot price” of an asset updates in real time and (as anyone who ever watched the crypto markets can attest!) are subject to change.
We mentioned a large exchange, the NYSE, which still has a trading floor where third-party human beings and exchange-connected computers act as intermediaries.
However, there is another major type of spot marketplace. It exists electronically and is known as the “Over-the-Counter,” or “OTC” market. The big difference between an exchange, like the NYSE, and the OTC market is that with the latter there is no third-party intermediary involved in the transaction. OTC trading only involves the buyer and seller.
Pricing works a little differently here. For one thing, they aren’t published to a ticker. The price can be set by the parties involved – and kept private.
Additionally, buyers and sellers aren’t restricted to the formal opening and closing times of a centralized exchange. The most popular OTC market, forex, trades 24 hours a day. OTC trading is less regulated than trading at exchanges, which has its advantages and some risks.
Compared to derivatives, spot trading concepts are easier to grasp, so it’s better suited for those investors who are just starting out.
Buy. Or sell. Done!
Are there downsides to spot market participation?
Well, there is that immediacy thing; price fluctuations can be stressful, and dips are frequent and can impact a trader’s crypto value and his or her psyche. “Margin trading” offers leverage and so gains there can be significantly greater than in spot markets. But then, trading on margin has its own set of risks.
To summarize, spot trading is the most prevalent, straightforward means of buying and selling assets. Other types discussed have their upsides and downsides, as discussed and they are trickier to navigate. But if you’re a beginner, spot trading may be for you!