The main difference between futures trading and spot trading lies in the timing of the transaction and how the assets are managed. Here is a detailed explanation of each:
Trading Spot
1. Definition: It refers to the immediate purchase or sale of an asset at the current market price, known as the spot price.
2. Execution: The transaction is settled immediately or within a very short period (usually 1-2 business days).
3. Asset ownership: When performing a spot trade, the buyer takes direct possession of the asset (e.g. cryptocurrencies, stocks, currencies).
4. Risk: The risks are limited to the fluctuations in the asset's price in the current market.
5. Use: It is ideal for those looking to acquire an asset and hold it or engage in short-term trades.
Example: If you buy 1 Bitcoin in the spot market, you own it immediately in your wallet.
Futures Trading
1. Definition: It involves a contract in which two parties agree to buy or sell an asset at a specific future date, at a predetermined price.
2. Execution: Settlement and delivery of the asset (if applicable) occur on the future date stipulated in the contract.
3. Asset Ownership: In many cases, it is not necessary to own the underlying asset. Futures contracts are derivative financial instruments.
4. Leverage: Futures allow trading with leverage, meaning you can control a large position with a smaller investment, but this increases the risk.
5. Risk: In addition to price fluctuations, the use of leverage can amplify both gains and losses.
6. Use: It is common for speculation, hedging, or risk management in volatile markets.
Example: If you buy a futures contract for Bitcoin with a one-month expiration, you do not own the Bitcoin at that moment, but you have the right/obligation to buy it at an agreed price upon expiration.
Comparative Summary
In conclusion, spot trading is more direct and simple, while futures trading offers more tools, such as leverage, but also carries greater risks.