What is trading on the spot

Spot trading is the process of directly buying and selling financial assets with payment “on the spot”. You can trade any asset on the spot – cryptocurrencies, securities, fiat currencies and commodities. Spot deals can be made on centralized and decentralized cryptocurrency platforms, as well as on stock exchanges and Forex.

What is a spot deal
The word “spot deal” should be understood as a simple order that is executed when two counterparties agree to sell/buy an asset. There are also futures contracts that are concluded immediately and are executed after a certain period of time.

With spot trading, the seller and the buyer have to have the assets available at the time of the transaction. This condition is set so that after the conclusion of the deal, the buyer immediately receives the purchased asset, and the seller – the money. The value of the contract at the conclusion of such transactions is called the word spot-price.

One can see the price at which the contract will be concluded in the stock market, while the selling price of the asset after the deal is executed is displayed in the strip.

Traders can use the spot price in the following cases:

entering into simple spot trades;
Determining the underlying value of an asset when calculating derivative pips;
assessing the accuracy of the price when carrying out futures transactions;
making settlements in the period of closing obligations under futures contracts.

Calculations for derivative positions are not performed immediately, but are based on the spot price on the exchange.

Peculiarities of spot trades
Not all contracts of this type are executed immediately. Sometimes the settlement of spot transactions is performed a little later – according to the rules of the exchange.

For example, in traditional markets, all spot contracts can be divided into three basic types:

TOD (T+0). The name of this group of transactions is an abbreviation of the word today – “today”. That is, the calculation is performed on the day of the contract.

TOM (T+1). Abbreviation of the word tomorrow – “tomorrow”. When such positions are opened, they are executed on the next trading day.

SPT (T+2). From the English word spot – “place”. A contract is settled two days after it is executed.

The words TOD and TOM are used only at the foreign exchange market. The T+ format is used on stock exchanges.

On the cryptocurrency market, such designations are not used. But sometimes spot-positions here too can be carried out not at once.

The timing of settlement and sale depends on three indicators:

The liquidity of the asset;
the spot rate at which the transaction is conducted;
The number of coins to be bought or sold.

If there is a sufficient volume of cryptocurrency in the exchange stack to execute an open position, the transaction is performed immediately. Otherwise, the transfer of the asset may occur later.

How to trade on the spot market
Conducting spot trades, it is necessary to consider that the level of profit depends on the efficiency of analytics. And the most common type of contracts on the spot market are positions that are executed immediately.

In most cases three types of orders are used for spot trading:

A simple market order. Executed almost instantly at the current price. In other words, the trader selects only the desired asset and the volume of transaction.

Limit order. In this case, a trader can choose an asset, specify its price (limit) and volume of the deal. The order will not be executed immediately but only at the moment when the rate reaches the specified price (limit level).

Limit Stop Order. This type of order works the same way as a limit order, but is not placed immediately. Along with the coin price (limit), the trader also specifies the order activation rate (stop). A position is opened when the price of a coin approaches the activation price (stop).

All three types of orders can be opened to buy and to sell. Similar types of transactions are used on the futures market, but there they are placed at the time the contract is concluded and not when it is sold.

Simple spot trades on the cryptocurrency exchange can allow traders to earn tangible amounts of money. But to do so, they need to be able to select promising tokens in order to sell them later at a bargain price.

How the deal is done
Regardless of the market, the spot purchase or sale on the exchange follows the following scheme:

An order is submitted specifying the asset, its price and quantity.

The seller locks in the amount of assets needed to fulfill the contract. The necessary amount is frozen on the buyer’s account.

After conclusion of the deal, the asset is transferred to the buyer, and the money is transferred to the seller.

The timing of execution may vary depending on various factors.

For example, spot contracts for securities may be executed with a delay. This is caused by the fact that the details of the investors, who have entered into a spot transaction, need to be recorded in the depositary and the share register.

The Forex market is essentially a spot market. Therefore, there is no need to wait for the transfer of the asset: all transactions are executed immediately. And after opening a position, the trader receives not a physical delivery of the currency, but the right to use it.