One article explains it all! The difference between spot and futures contracts (1)
In the ever-changing world of financial investment, spot and futures contracts are two very common trading methods. For newcomers to investing, the differences between the two can often be confusing. In fact, by analyzing a few core dimensions, you can easily distinguish between them. Let's take a closer look at the differences between spot and contract trading.
1. Trading objects: tangible goods vs. a piece of paper
(1) Spot trading
In our daily lives, when we go to the supermarket to buy fruits, pay on the spot, and take the goods, this is the most intuitive form of spot trading. In the financial market, the objects of spot trading are real goods or financial assets, such as precious metals like gold and silver, as well as financial products like stocks and foreign exchange. Once the transaction is completed, the ownership of the goods or assets is immediately transferred, allowing the buyer to genuinely own these assets.
(2) Contract trading
Contract trading does not involve physical goods, but rather a standardized contract. Taking futures contracts as an example, it stipulates that a certain quantity and quality of goods or financial assets will be delivered at an agreed price at a specific time and place in the future. For instance, when you buy a crude oil futures contract, it does not mean you immediately own crude oil, but rather you gain the right and obligation to purchase crude oil at the agreed price at a specific future time.
2. Trading purposes: meeting actual needs vs. chasing price differences
(1) Spot trading
The main participants in spot trading typically aim to satisfy actual production or living needs. Businesses purchase raw materials to maintain their daily production operations; consumers buy goods to meet their daily needs. For example, a bakery owner purchasing flour from a flour mill does so to obtain the raw materials for making bread, ensuring the normal operation of the shop.
(2) Contract trading
Investors participating in contract trading primarily seek to gain profits from price fluctuations or hedge against risks in the spot market. Investors predict market trends, buying contracts at low prices and selling them at high prices to earn the price difference. Hedgers use contract trading to reduce the impact of spot price fluctuations on their operations. For example, an oil producer concerned about future declines in oil prices can sell crude oil futures contracts in the futures market to lock in the sales price in advance, avoiding the risks associated with price drops.
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