Discuss the differences between spot, leveraged, and futures trading.
1. Spot trading
Core concept: Instant settlement. After both parties reach a transaction, the exchange of assets (such as stocks, cryptocurrencies, physical commodities) and funds occurs immediately (or within a very short time, usually T+0 or T+1).
Ownership: After buying, you **actually own** the asset. For example, if you buy 100 shares of Apple stock, you are the legal owner of those 100 shares.
Purpose:
Long-term investment: Optimistic about the long-term value of an asset, buying and holding.
Short-term speculation: Predicting short-term price fluctuations for buying low and selling high.
Actual use: Purchasing commodities for consumption or production (e.g., factories purchasing crude oil).
Funding requirement: Usually requires **full funding for purchase. To buy an asset worth $10,000, you need $10,000 in cash (or equivalent).
Risk characteristics:
Maximum loss: Theoretically, the loss limit is all the principal you invested (if the asset price drops to 0).
No forced liquidation: As long as the asset does not delist/disappear, you can hold it indefinitely waiting for the price to rise, and you will not be automatically sold due to a price drop (unless using leverage or the broker has special regulations).
Complexity: Relatively the simplest and most basic.
Example:
In the stock market, buy Tencent shares with cash.
Purchase 1 Bitcoin with fiat currency on the exchange.
A gold shop purchases gold bars with cash.
2. Leveraged trading (usually referring to spot leverage)
Core concept: Trading with borrowed money (magnifying spot). Essentially spot trading, but borrowing funds or assets from the platform or broker to magnify your trading capital, thereby magnifying potential gains and risks. The traded assets are spot assets.
Ownership: If you buy with leverage (go long), you actually own the bought asset, but you also owe a debt (the borrowed money or coins). If you sell short using leverage, you are borrowing the asset to sell, and you will need to buy it back in the future to return it; you do not own that asset.
Purpose: Mainly **short-term speculation, using leverage to amplify capital efficiency, obtaining considerable profits (or losses) from small price fluctuations. Not very suitable for long-term holding (due to interest or funding costs).
Funding requirement: Only a portion of the funds needs to be provided as margin (collateral). For example, under 10x leverage, buying $10,000 worth of assets only requires $1,000 in margin (borrowing $9,000 from the platform).
Key mechanism - Forced liquidation:
This is the core risk point of leveraged trading.
When market price fluctuations cause your margin ratio (net value / occupied margin) to fall below the platform's specified **maintenance margin ratio** (liquidation price), the platform will forcibly sell your position (or buy back a short position) to repay debts, preventing further losses.
Under extreme volatility, forced liquidation may lead to losses **exceeding** the initial margin.
Risk characteristics:
Amplifying gains and losses: The higher the leverage multiple, the greater the potential amplification of gains and losses.
High liquidation risk: The forced liquidation mechanism accelerates the speed of losses, making it easy to rapidly deplete the principal or even incur a debt to the platform during unfavorable price fluctuations.
There are funding costs: Borrowing funds or assets typically requires paying interest or funding rates.
Complexity: More complex than pure spot, requires understanding margin, forced liquidation mechanisms, funding rates, etc.
Example:
Using $1,000 margin (10x leverage) to go long on $10,000 worth of Bitcoin (equivalent to borrowing $9,000). If Bitcoin rises by 10%, gain $1,000 (double); if it falls by 10%, lose $1,000 (liquidation).
Using margin financing and securities lending functions in a brokerage account to borrow money to buy stocks or borrow stocks to sell.
3. Futures trading
Core concept: Standardized contracts + future delivery. What is traded is not the asset itself, but the standardized contracts signed by both parties, agreeing to buy and sell a certain quantity of the underlying asset (such as commodities, stock indices, currencies, cryptocurrencies, etc.) at a specified price on a specific date in the future.
Ownership: The transaction is for contracts, not immediate ownership of the assets. Before the contract expires, the holder only has the rights and obligations to buy or sell the underlying asset at a future point in time (unless closing the position before expiration). Most futures traders will close their positions before expiration and not engage in physical delivery.
Purpose:
Hedging risk: Producers or consumers lock in future buying and selling prices to avoid price fluctuation risks (e.g., farmers selling grain, airlines buying fuel). This is the core function of the futures market.
Speculation: Buying and selling based on predictions of future price trends to profit.
Arbitrage: Profit from price differences between different markets or contracts.
Funding requirement: A margin system is used. Only a certain percentage of the contract value needs to be paid as margin (usually lower than the spot leverage margin rate) to open a position. Margin is divided into initial margin and maintenance margin.
Key mechanism:
Expiration date: Each futures contract has a clearly defined last trading day and expiration delivery date.
Daily settlement without liabilities/mark-to-market: One of the most important mechanisms. At the end of each trading day, profits and losses for all open contracts are calculated based on the day's settlement price. The account of the profit party increases funds, while the account of the loss party decreases funds (must replenish margin). This ensures that risks are released in real-time.
Forced liquidation: If the account equity falls below the maintenance margin requirement, you will be required to add margin or face forced liquidation.
Delivery or cash settlement: Upon expiration, the contract may involve physical asset delivery (common in commodity futures) or cash settlement (index futures, many cryptocurrency futures).
Risk characteristics:
High leverage: Margin trading is essentially leveraged, magnifying profits and losses.
High volatility risk: Futures prices usually fluctuate more than spot prices.
Time decay risk: The value of the contract converges to the spot price as the expiration date approaches, which may be unfavorable for the position.
Unlimited loss potential (theoretically): For sellers (shorts), if the price keeps rising, losses theoretically have no limit (although in practice, liquidation stops losses). For buyers (longs), the maximum loss is the entire margin (if the price drops to 0).
Margin call risk: The mark-to-market system may require continuous margin additions.
Complexity: The most complex among the three, requires understanding contract rules, expiration dates, delivery methods, margin management, basis, premiums, and discounts.
Example:
Oil producers sell crude oil futures contracts expiring in three months to lock in future sales prices and avoid the risk of falling oil prices.
Speculators believe that soybean prices will rise, buying soybean futures contracts (only need to pay margin). If the price rises as expected, they sell and close the position for profit before expiration.
Trade Bitcoin perpetual futures contracts (a special type of futures with no expiration date, but with a funding rate mechanism simulating financing costs), using 100x leverage to bet on the price direction.