Spot trading pertains to the direct buying and selling of financial assets like cryptocurrencies. It offers the simplest way to invest in crypto. Moreover, spot trading occurs in spot markets that are either over-the-counter or exchange-based. Usually, in spot trading, you can only use the assets that you fully own—no leverage or margin.
Spot Market, Explained
Before diving deeper into what is spot trading, let’s define the spot market first.
A spot market is a financial market that is open for immediate, public trades. In spot markets, a buyer purchases an asset with fiat or digital currency from a seller instantly.
A spot market is also often referred to as a cash market because traders usually pay the transactions upfront. Spot markets come in various forms—third parties like crypto exchanges often facilitate them.
Spot Trading, Explained
As mentioned, spot trading refers to the direct buying and selling of financial assets like cryptocurrencies. Moreover, spot traders make a profit in spot markets by purchasing assets and wishing they would rise in value. When it does, they can sell their assets as well.
Spot trading can also short the market by selling the assets and repurchasing them when the price gradually decreases.
Spot Prices, Explained
The spot price is what we call the current market price of an asset. Investors use a market order (in an exchange) to purchase or sell holdings immediately at the best spot price available.
Spot prices are always updated in real-time; however, over-the-counter spot trading works differently. In over-the-counter trading, investors can directly purchase from another party without an order book.
Advantages of Spot Market and Trading
1. Spot markets provide transparent prices and only rely on the supply and demand in the market.
2. Spot trading provides simpler rules in trading, rewards, and risks. Investors can easily calculate the risks they might accrue based on entry and the current price of an asst.
3. There is a “set and forget” mechanism in spot trading. Here, traders wouldn’t need to worry about getting a margin call or getting liquidated. Instead, investors can easily enter and exit a trader whenever they please.
4. Investors wouldn’t need to keep checking their investments in spot trading unless they want to make short-term trades or investments.
Nevertheless, spot trading in spot markets is among the easiest ways to trade. It is perfect for beginners—it is straightforward, fast, and almost instant. Of course, one should still do their own research before diving into spot trading and spot markets—know its advantages, disadvantages, and strategies that you would need to know when treading this market.
In all kinds of trading, it’s better to combine your knowledge with a sound analysis of the market.
Disclaimer: This article solely expresses the author’s thoughts, which may not reflect those of Enifex. Nothing in this article should be interpreted as investment guidance. Enifex encourages all clients to do their own research before investing in cryptocurrencies.