Spot trading is the immediate buying and selling of financial assets such as stocks, currencies or commodities at the current market price. These transactions are settled quickly, usually within two business days, with the assets being exchanged directly between the parties.
Spot trading transactions take place on over-the-counter (OTC) platforms as well as major exchanges such as the New York Stock Exchange and the Nasdaq Stock Market.
Spot Trading in a nutshell
- Spot trading involves immediate buying and selling of financial assets at current market prices, settled within two business days.
- Transactions occur on both over-the-counter (OTC) platforms and major exchanges like NYSE and Nasdaq.
- Alternatives to spot trading include derivative contracts like options and futures.
Which are the different types of Spot Trading Markets?
There are two kinds of marketplaces where you may conduct spot transactions. Spot trading markets like OTC markets and big market exchanges like the NYSE and Nasdaq.
OTC Markets
Investment securities traded on the over-the-counter (OTC) market are not subject to third-party regulation. Due to the lower standards for the OTC market, securities tend to be riskier than those listed on the stock exchanges. It is possible for investors to take leverage of spot trading on these platforms, wherein the payment and supply of the underlying assets take place immediately.
Market Exchanges
US stock exchanges such as the New York Stock Exchange (NYSE) or Nasdaq are well reputed, as are London’s stock market, Shanghai’s stock exchange, and Hong Kong’s stock exchange (HKSE). For rapid delivery and payment, spot trades are available in these significant marketplaces.
What are the alternatives to Spot Trading?
There are several alternatives to spot trading, such as option contracts or future contracts. They are also worth consideration because spot trades are transactions in which prompt payment and delivery of the investment are not required. Derivative contracts, such as the named, allow traders to purchase only at certain prices and dates.
Option Contracts
Arrangements in which the owner has the choice but not the necessity to purchase a security at a defined price and date.
Future Contracts
The purchase or sale of certain securities at a predetermined price and date is the subject of an agreement between the parties. Because options and futures contracts are not settled immediately, they are not deemed spot trading.
Spot trading has a great option for trading with major enlisted exchanges for a better experience. Swaps, options, and futures contracts can be used as spot trading substitutes. By learning about the various transactions, investors may better assess their portfolio’s trading potential.
Why do day traders prefer Spot Trading?
Since derivative contracts expire, investors that day trade prefer spot trading since they may hold short-term positions. Think about immediately purchasing XYZ shares via your broker and placing a “market order,” where you pay for the shares and get them immediately. A spot trade is what you’re doing if you do that.
Example: How to trade Binary Options on Spot Prices?
Trading binary options on spot prices means predicting the future movement of an asset’s price without owning it. The asset price when you buy a binary option is known as the spot price. The spot price serves as the reference point for determining whether a binary option expires in-the-money (profitable) or out-of-the-money (unprofitable).
Let’s say the current spot price of gold is $1800 per ounce. You purchase a binary call option with a one-hour expiry time, predicting that the spot price of gold will be above $1810 at expiry.
The price for gold rises to $1815 within the hour. At expiration, the binary option expires in the money because the price ($1815) is higher than the spot price ($1815). You make a profit based on the predetermined payout percentage.
If the price dropped below the spot price of $1800 at expiration, your binary option would expire out of the money, resulting in a loss of your initial investment.