Spot vs Futures: Understanding the Differences
In trading, it is essential to know how and when to apply the right strategy. Spot trading and futures trading may seem similar, but they offer very different paths to success. Each has its own advantages, risks, and practical applications that can significantly influence the outcomes of your investments. Whether you are looking for immediate gains or protecting yourself from future risks, understanding how spot and futures transactions work will allow you to enhance your edge in any market.
What is a spot market?
The spot market is where financial instruments such as stocks, commodities, or cryptocurrencies are bought and sold for immediate delivery. This means that when a transaction is made in the spot market, the asset is exchanged immediately at its current market price. The term "spot" comes from the immediacy of the transaction: the asset is bought or sold "on the spot". Prices in spot markets are determined by the forces of supply and demand, and this causes spot prices to directly reflect the value of the asset in real-time.
What is a futures market?
The futures market involves trading contracts that agree to buy or sell an asset at a predetermined price at a specific future date. Instead of owning the asset immediately, it is agreed to receive it (or settle the contract in cash) at some point in the future. This allows traders to speculate on future price fluctuations of an asset. Futures contracts are widely used for speculation and hedging risks. Traders can benefit from price fluctuations without owning the asset until the contract's expiration date.
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