The difference between Spot Trading and Futures Trading
Financial markets are a vast arena for investment and trading opportunities, with the mechanisms and products available varying based on the needs and goals of investors. The most prominent trading methods in cryptocurrencies and traditional markets are spot trading and futures trading. This article seeks to cover all aspects related to these two types of trading, from basic concepts to nuances, advantages and disadvantages of each, and the tools associated with them.
First: Spot Trading
The concept
Spot trading means buying or selling a particular asset (such as cryptocurrencies, stocks, or commodities) at the current market price (spot price).
The asset is transferred directly from the seller to the buyer after the transaction is completed, and the buyer becomes the actual owner of the asset.
Mechanism
1. Instant Order: The trader places an order to buy or sell the asset at the available price.
2. Transfer of ownership: When the transaction is completed, the asset is transferred to the buyer's wallet.
3. Storage: Purchased assets are stored either on the platform or in external wallets.
Features
1. Direct ownership:
It allows the trader to actually own the asset, whether it is a cryptocurrency, commodity or stock.
The asset can be used or held for the long term.
2. Simplicity:
This type of trading is less complicated compared to futures.
There are no additional contracts or terms.
3. Limited risks:
The risk is limited to a decrease in the value of the asset purchased.
4. Ideal for beginners:
Due to its ease of use and clarity, spot trading is a popular choice for new traders.
Disadvantages
1. Profit is limited to height:
Profits only come if the value of the asset increases.
2. Need for more capital:
To buy high-priced assets, such as Bitcoin, a trader requires a large capital.
3. Liquidity:
Some assets may be illiquid, making it difficult to sell.
Second: Futures Trading
The concept
Futures trading is based on futures contracts, which are an agreement between two parties to buy or sell a particular asset at a pre-determined price on a future date.
The asset is not actually owned, but rather traded based on expectations of price movement.
Mechanism
1. Contract:
The trader enters into a contract with a fixed price and duration.
Contracts can be monthly, quarterly, or ad hoc as agreed.
2. Settlement:
Either cash settlement (without delivery of the asset) or physical settlement where the asset is delivered.
3. Leverage:
A trader uses leverage to increase the trading volume compared to the invested capital.
Features
1. Leverage:
It allows the trader to control large amounts with a relatively small amount.
Enhances profit potential.
2. Profit in both directions:
You can profit whether the market is going up (buy trades) or down (sell trades).
3. Diversity of strategies:
Suitable for hedging against market volatility.
Provides opportunities for short-term trading.
4. High liquidity:
Futures contracts are often more liquid, allowing for easy entry and exit.
Disadvantages
1. High risk:
Leverage multiplies profits but also multiplies losses.
2. Non-ownership:
The trader does not own the asset itself, which prevents him from benefiting from storing or using it.
3. Trading complexity:
Requires experience in reading the market and understanding contracts.
4. Settlement:
A trader may lose all of his capital if he does not adhere to risk management.
Differences between spot and futures trading
Factors for choosing the right type
Spot trading is right for you if:
I was new to trading.
You want to keep the original for a long time.
You don't want to deal with the complexities of futures contracts.
Prefer to trade with low risk capital.
Futures trading is right for you if:
You have trading experience and a good understanding of the market.
Want to make quick profits using leverage?
You need advanced strategies for hedging or speculation.
You can manage risks effectively.
Conclusion
Both spot and futures trading are powerful trading tools in the financial markets, but the choice between them depends on your goals and level of experience.
Spot trading: simple and relatively safe, suitable for long-term holding.
Futures Trading: Provides greater opportunities for big profits but with higher risks and greater complexity.
To avoid excessive risks, new traders are advised to start with spot trading, and then move to futures after gaining enough experience and knowledge to manage the complexities and risks.