Spot trading means the direct purchase or sale of financial instruments and assets such as digital currencies, forex and stocks. In this type of transaction, most transactions are immediate. Spot transactions are carried out in both forms of spot market, i.e. exchange-based or over-the-counter (OTC).
When you trade in the cash or spot market, you can only use your own assets and you will not have any leverage or additional funds on hand. Centralized exchanges make it easier to conduct spot transactions by establishing specific regulations and monitoring them, but in return, they charge fees to users. Decentralized exchanges also perform this network of services using smart contracts on the blockchain.
Spot or cash trading is the easiest way to invest and trade. Probably your first experience of investing in the digital currency market was a cash transaction in the spot market. For example, buying Bitcoin or Ethereum in the market and holding them. Spot markets exist in many asset classes, including cryptocurrencies, stocks, commodities, forex, and bonds. You are probably more familiar with spot markets. For more detailed information our Asiasignal’s VIP channel can be a wonderful help.
What is the spot market?
The spot market is a financial market for general traders where assets are traded immediately. The buyer buys the asset from the seller using fiat currency or another asset. Asset delivery is often immediate, but again it depends on what is being traded. Cash markets are also known as instant and spot markets. These markets exist in different forms and usually exchanges facilitate these transactions as intermediaries. Of course, you can trade over the counter (OTC) and directly with others.
What is spot trading?
Spot traders make a profit by buying assets in the hope that their value will increase and then selling those assets when the price increases. Also, spot traders can profit by selling the asset and buying it back when the price drops. In fact, the current price of an asset in the market is known as the spot price. By placing an order on the exchange, you can buy or sell your assets immediately at the best current price. However, there is no guarantee that the market price will not change during the execution of your order.
Also, there may not be enough volume to fulfill your order at the price you want. For example, if your order is for 10 Ethereum (ETH) but only 3 Ethereum (ETH) are supplied at that moment, you should place the rest of your order at a different price. Asset spot prices are updated real-time and change as orders change. It is also possible to do spot transactions without an intermediary, that is, you can do a fixed amount and price directly from another party without buying from the exchange.
Depending on the type of asset, the settlement of these transactions can be done immediately or at most within the next two business days (T+2). In the past, the transfer of shares required the transfer of a physical certificate. The foreign exchange market used to transfer assets through cash or in the form of deposits. Now, with the use of digital systems, the delivery of assets is almost instantaneous. Digital currency markets are open 24 hours a day and enable instant transactions.
Intermediary or direct transactions
Spot trading is not limited to just one form. While most people do this form of trading on exchanges, you can trade your assets directly with others without the need for a third party. As we said, these purchases and sales are also known as over-the-counter (OTC) transactions.
Digital currency exchanges are centralized (CEX) and decentralized (DEX). A centralized exchange manages the trading of assets such as cryptocurrencies, forex and commodities. An exchange acts as an intermediary between market participants and as a transaction broker. To use a centralized exchange, you need to top up your account with the fiat or digital currency you want to trade.
A proper centralized exchange ensures that transactions go smoothly; Other responsibilities include regulatory compliance, identity verification (KYC), fair pricing, security and customer rights protection. In contrast, the exchange charges users a fee for facilitating transactions and other services. For this reason, exchanges can profit in both bullish and bearish markets as long as they have enough users and trading volume.
Transactions without intermediaries
Over-the-counter transactions are sometimes referred to as off-exchange transactions. In this model, assets are traded directly between buyers and sellers. Spot trading in the over-the-counter market uses multiple communication methods to organize itself, including telephone and instant messaging. The most important advantage of OTC trading is that you no longer need to register an order in Wordbook.
If you trade assets such as small coins with low liquidity, it is possible for a large order to slip. The exchange often cannot fill your order at the desired price, so you must consider higher prices to fill the order. For this reason, large broker-free deals often have better prices. Note that even liquid assets like Bitcoin can suffer slippage when orders are too large; Therefore, to register large orders of Bitcoin (BTC), you can also use broker-free transactions.
Advantages and disadvantages of spot markets
Each type of trade and trading strategy you use has its advantages and disadvantages. Understanding these things will help you to trade with more confidence by reducing risk. Cash trading is one of the easiest ways to trade, but it still has its strengths and weaknesses.
Advantages of spot markets
The prices are transparent and only depend on supply and demand in the market. This aspect contrasts with the futures market, which often has multiple reference prices. For example, the price in the Binance futures market is derived from other data such as the capital rate, price index, and underlying moving average (MA). In some traditional markets, prices may be affected by interest rates.
Spot trading is easy to do because of its simple rules, rewards and risks. When you invest $500 in the cash market, you can easily calculate your risk based on the purchase price and the current price of the asset.
You can place your order and stop thinking about it! Unlike derivatives and margin trading, in cash trading you don't need to worry about liquidation or receiving margin. You can enter or exit the trade whenever you want. You also don't need to review your investment strategy unless you want to make short-term trades.
Disadvantages of spot markets
Depending on what you trade, the cash markets can provide you with assets that can be inconvenient to hold. Goods are perhaps the best example. If you buy crude oil in cash, you must take physical delivery of the asset. In the case of cryptocurrencies, holding the tokens and coins gives you the responsibility to keep them safe and secure.
The potential profit in cash trading is much lower than in futures or margin trading. You can use the same amount of capital to trade in better positions.
Spot trading in cash markets is one of the most common trading methods for people, especially beginners. It may seem overly simple but it's always good to know more about its pros, cons and potential strategies. Apart from the basics, you should combine your knowledge with technical analysis, fundamentals and sentiment management. Asiasignal’s VIP channel, which has so many users from all over the world, is here for you. Buy Asiasignal’s VIP indicator and be the first to get all the news related to cryptocurrency world.