Spot Trading

Spot trading refers to transactions which are executed and settled instantly. Spot trading strategies can be carried out on stocks, forex, cryptos and commodities such as gold. FX spot trading is the largest market in the world with a daily trading volume of more than $6 trillion. Use our guide to spot trading for beginners, with investing tips, platform reviews and more.

Best Spot Trading Brokers

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Coinbase is the easiest place to buy, sell, and manage your cryptocurrency portfolio.
This post contains affiliate links, and this website will be compensated if you make a purchase after clicking the links.
Kraken is a top crypto trading exchange offering the largest altcoins by market cap.
Binance is one of the leading online crypto exchanges offering Bitcoin.
IB Boast a huge market share of global trading. With a minimum deposit of $10,000 however, they remain an option for larger traders only.
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Spot Trading Explained

The simple definition of a spot trade is the purchase or sale of a foreign currency, financial instrument, or commodity for instant delivery on a specified date. Instant delivery means that the exchange of assets happens in the moment, as opposed to non-spot trades where a price is agreed, but the exchange happens at a later date.

The price at which a financial instrument can be bought or sold immediately is known as the spot price. The spot price is set by the buyers and sellers on that market through supply and demand. For example, if an asset becomes particularly desirable, sellers will ask for more money for it, and buyers will be willing to pay more – therefore, the spot price will quickly increase. Forex spot contracts are the most common way of spot trading and are usually settled in two business days. Spot trades on cryptocurrencies are settled instantly.

How spot trading

If you are an individual trader, you can profit from spot trading by buying assets at a low cost and selling them while they are high. However, spot trading is particularly useful for companies that need the asset they are buying. For example, a plane company might need extra fuel, which they can purchase on the spot market and have delivered within two days. Spot trading is also useful for energy companies, that can sell electricity if they have a surplus and negotiate prices.

How Spot Trading Works

Spot trading is intuitive, easy to grasp and lends itself to multiple risk management strategies. Therefore, it is an ideal first step for beginners who are new to investing. To understand more about spot trading, let’s look at an example:

  1. Let’s say you want to buy a commodity, such as gold, on a spot market using USD
  2. Firstly, you need to find a broker and platform that offers the required trading pair – in this case XAU/USD
  3. In your chosen trading platform, 1 ounce of gold has a spot price of $1,870, and a futures price deliverable in one month of $1,920. This means you can buy 1 ounce of gold now for $1,870, or you can agree to buy 1 ounce of gold in one month for $1,920. It also means that the price of gold is expected to rise. The basis is the difference between the futures and the spot price – in this case, $50.
  4. You then place a spot buy order at your desired price and quantity. If a seller is happy with your offer, they will accept it, and once the transaction is completed the gold will be transferred to your portfolio. The transaction is usually settled in two business days.
  5. This means you may profit from capital appreciation if the value of gold increases over time. You can trade with this gold at any point.

It is also possible to open a short position on a spot market. However, because spot trading requires immediate delivery and you do not own the asset to sell, you will need to buy the assets back before the end of the trading session. You cannot open short positions on a spot market with crypto, as the exchange happens instantly.

To sell short, most spot market platforms will require you to have sufficient capital in the desired currency. Some spot market platforms, such as Kraken, only allow users to open short positions when margin trading.

There are two main types of spot markets:

  1. Over-the-counter (OTC) – Also referred to as off-exchange trading, OTC assets are not traded on a formal exchange, like the New York Stock Exchange (NYSE). Sellers and buyers meet on an open exchange to trade through bilateral agreement without regulation from a third-party supervisor. The selling or buying price does not need to be published, so you can offer different prices to different dealers. Investments that trade OTC often include derivatives, forex and cryptocurrencies.
  2. Market exchange – This is a formal, organised marketplace in which sellers and buyers trade assets. Selling or buying prices are public and regularised, meaning they are more transparent but less flexible. The two biggest exchanges by market capitalisation are the New York Stock Exchange (NYSE) and Nasdaq.

Spot trading is not the same as instant buy: in spot trading, you use a platform to buy and sell assets from other traders, but instant buy means you buy or sell assets from your broker. Spot trading is similar to a P2P exchange because you can also buy and sell crypto from other traders, but in P2P the trading volume is limited and often has higher trading fees.

Spot Market Vs Future Market

The spot trading market is different from the futures market in that when you purchase a futures contract, you do not own the asset. Instead, you are buying or selling a contract which represents the value of the asset, for example Dogecoin.

This contract is an agreement to buy or sell a specific asset at a future date. You can trade with this contract, but you will only own the asset on the day your contract expires. Many assets will have a “spot price” (the cost to buy right now) and a “futures price” (the cost of buying at a later date) which accounts for interest rates and other factors and reflects how the market thinks the asset will behave.

As described in the example above, if you buy one ounce of gold on a futures contract, it will be one month until you receive the gold in your portfolio, and until you must pay for it.

Futures contracts allow traders to speculate on the future price of an individual asset without owning it. Therefore, you can take advantage of market volatility: if you are expecting a price to rise, you will buy a futures contract to go long, or if you are expecting a fall, you will sell a futures contract to go short. This is unlike typical spot purchases in which you only make a profit if the price rises. However, future prices are often higher than spot prices, as they account for interest and other factors.

Additionally, futures contracts are often used to hedge against losses. Many traders use futures contracts to protect their portfolios against market volatility. Futures exchanges often have extra safeguards and insurance policies because of their complexity. Spot trading is recommended for beginners as it is a relatively straightforward and low risk strategy.

Spot Trading Vs Leveraged Trading

Some exchanges allow traders to carry out spot trades using leverage. This is also known as margin trading. Users essentially borrow capital from a broker to maximise profits.. However, this can also increase losses.

For example, let’s say your equity is $1,000. If your broker offers 1:100 leverage, you could take a position of $100,000 ($1,000 x 100). In this scenario, your broker would be effectively lending you $99,000. Any profit or loss on your position would be magnified 100 times.

Spot trading vs leveraged trading

When using a spot exchange without leverage, you will need sufficient capital in one currency to be able to exchange it for another. For example, you must have a USD balance to exchange USD for BTC on the spot exchange. As long as you have adequate collateral currencies, as defined by the broker, you will be able to open a margin position even if you do not hold a balance in the asset you wish to trade.

Spot trading and leveraged trading on cryptos is available with most reputable online brokers, including Binance, Coinbase, Gate.io, Bybit, Okex, Kraken and Kucoin. However, rules for spot trading and margin trading differ between brokers. For example, leveraged trading is only available on Binance using futures while on Kraken opening a short spot position is only possible with leverage. See our respective reviews for details on fees, mobile apps, trading history and more.

Pros Of Spot Trading

Beginners may be drawn to spot trading because of its ease and simplicity. Other benefits of spot trading include:

  • Delivery – One of the major advantages spot trading has over other forms of trading, such as futures, is that the transaction is settled immediately. The settlement date for stocks, forex and other commodities, such as gold and metals, is two business days after the execution day. For cryptocurrencies, settlements occur instantly.
  • Risk – Unlike margin trading where losses can be magnified, the most you can lose spot trading is your initial investment. This makes spot trading an ideal candidate for those new to trading looking to develop their skills.
  • Liquidity – Spot markets are highly liquid. The spot price is the current price for the immediate purchase, payment, and delivery of a certain asset. Prices in derivatives markets such as for futures and options will therefore be based on the spot price. A liquid market is considered less risky as there will always be someone willing to take on the other side of the position.
  • Transparency – If you are trading on an exchange, prices are typically public. Moreover, the prices reflect the current value of the asset, as opposed to the estimated future value. This means you do not need to speculate, making it easier for beginners.
  • Flexibility – If you are trading over the counter, you can look for deals from different dealers, choosing the most convenient option for you. You can also hold if you are not happy with the current prices. The spot market also offers the possibility to trade in smaller amounts, while future contracts often have minimum investment requirements.

Cons Of Spot Trading

The simplicity of spot trading also means there are less strategic advantages:

  • Immediate delivery – Because the exchange of assets happens immediately, you can only trade with assets you own, as opposed to futures contracts where you can agree to pay a certain amount of an asset even if you do not own it yet. This means that selling short in spot trading is limited.
  • Lack of transparency – If you are trading over the counter, buying or selling prices are not public. Therefore, you cannot be sure if the deal you are being offered is higher, similar or lower than the rest of the deals happening at the same time.
  • Volatility – Exchange rates for certain assets, like currencies, are extremely volatile. It is important to study the market carefully to ensure you are opening or closing your position at the right time.

How To Start Spot Trading

  1. Pick a market: Choose what assets you would like to trade. These could be forex, commodities, cryptocurrencies or an alternative.
  2. Choose a broker, open an account and log in: You should carefully examine the benefits offered by each broker, and choose one that meets your needs. Check out the next section to learn more on how to choose the best broker for you.
  3. Find an opportunity: Many brokers offer technical indicators and signals that you can use to inform trading decisions. You should also keep an eye on the order book, which shows the price at which other traders are looking to buy or sell. It’s a good idea to define a trading plan before you begin.
  4. Decide if you are going long or short: Analyse whether your target asset is likely to increase or decrease in value. If it is likely to increase, you can buy some (go long). If it is likely to decrease, and you own some of this asset, you can sell it (go short). Before you open a position, it’s important to know how much capital you stand to earn or lose on that trade. There are multiple online profit calculators which can help you work this out.
  5. Place stops and limits: Some brokers offer stop losses and take profit features, which are a great way to control your risk and increase your profit without constantly looking at the market.
  6. Monitor the market: keep an eye on the technical indicators and order book offered by your broker.
  7. Close your position: If you think the market is in a profitable position, close your position. You can then calculate your profit or loss. Remember to follow your trading plan to close positions.

Note, any profits earned from spot trading may be subject to capital gains tax in the country you live in. Check the tax treatment of your local government to see at what point your earnings will become taxable.

How to start spot trading

What To Look For In A Spot Trading Broker

  • Markets – Different brokers offer different trading markets. Ensure that your broker deals the market and the forex pair, for example, that you’re interested in. You will also need to check that the broker allows citizens from your country to spot trade. If you want to trade on a particular exchange market, for example the New York Stock Exchange, find a broker that facilitates access.
  • Execution of spot orders – A delay of even a few seconds in processing your order can lead to a loss, so ensure your broker offers instant executions.
  • Trading volume – Choosing a platform with a high volume of buyers and sellers will mean increased liquidity. Brokers with an international presence are more likely to have plenty of customers to sell or buy your assets.
  • Market indicators – Market indicators such as signals and alerts will help you make informed decisions. Choose a broker that has market indicators that will be useful for you, and if you are a beginner, find a broker that has tutorials and explanations to better understand how these indicators work.
  • Fees and charges – Each broker will have a minimum account deposit, minimum trade size and a spot trading fee. Ensure that your broker has low trading fees, a minimum deposit and volume that matches what you are willing to invest.
  • Platforms – Many online brokers offer a variety of platforms including browser-based websites and mobile apps. To ensure a stress-free trading experience, look out for platforms and apps with user friendly interfaces, extensive features, and positive online reviews. Many platforms will also offer demo accounts which are a great way to develop your trading skills and get to grips with a platform before investing real money.
  • Customer support – Customer service can be in the form of live chat, email or telephone. Good customer support means that any problems that you have can be more easily resolved. Reading online reviews is a great way to assess the quality of a broker’s customer support.
  • Regulation – A regulated broker is more likely to be held accountable for any mistakes and will increase the security of your funds.

Final Word On Spot Trading

Whether you’re in Hong Kong, India or Romania, Delhi, Dubai or Abu Dhabi, spot trading is an attractive first step for many investors. In a bull market, spot trades can help generate profits, and their simplicity means that transactions can be carried out quickly and easily. However, spot trading doesn’t necessarily lend itself to complex bot strategies usually associated with futures or options contracts which may be limiting for more experienced investors.

If you want to start understanding more about spot trading cryptos, companies such as Binance, Coinbase and Kraken offer their own academy, tutorials and telegram channels which describe spot trading systems, techniques and patterns for dummies.

FAQ

What Is Spot Trading?

The simple definition of a spot trade is the purchase or sale of a currency, financial instrument, or commodity for instant delivery on a specified date. This could be stocks, gold and other metals, crude oil or cryptocurrencies like Bitcoin and Doge.

Is Spot Trading A Good Idea?

Spot trading is an easy concept to understand, which makes it an ideal starting point for beginners. Furthermore, spot trading without leverage is arguably less risky as the most you will lose is your initial investment. However, in a bear market it can be hard to make a profit as spot trading doesn’t generally lend itself to advanced strategies.

Is Spot Trading Halal?

Spot trading is considered Halal and not Haram in Islam if the availability of delivery and payment are within the spot period. Consult your local religious leader for more details.

Where Can I Spot Trade Cryptocurrency?

Most reputable online brokers allow users to trade on the spot market, but rules and restrictions vary between platforms. Some of best-known crypto brokers offering spot markets include Binance, Coinbase, Kraken, Okex, Gate.io and Bybit.

When Are Spot Trading Hours?

Spot gold and silver trading is available during the working week for 23 hours a day, closed only from 9pm to 10pm GMT daily. Crypto spot trading is open 24/7. For other trading hours such as spot metals, energies and stocks, check the market operating hours in the relevant area.