Spot trading refers to transactions that occur in the spot market. After the transaction is completed, the buyer and seller need to make physical delivery in real time or within a few trading days. In mature financial markets, most spot transactions generally implement the so-called "T+2" system. For example, stock transactions are mostly settled two trading days after the transaction.
However, in spot trading, transactions do not need to be concentrated in a specific place and time. This is also called "over-the-counter trading" (OTC). OTC means that buyers and sellers negotiate one-on-one and trade in the so-called "one hand for cash and one hand for delivery". It does not need to be processed through a central exchange like in the stock market. Spot London gold is the best example.
Simply put, spot trading is the most traditional and direct type of transaction, just like real-time physical transactions in the market through open bidding.
The counterpart of spot trading is futures trading, and futures trading itself is also developed on the basis of spot trading. Futures trading means that the buyer and seller agree to buy and sell a certain asset or commodity of a certain quantity and quality at a specific time and place in the future according to the terms of the contract and the transaction price.
In the futures market, most of the early participants were manufacturers, wholesalers and retailers of some commodities. This type of transaction originated from the Japanese rice market in the 16th century and later developed all over the world. Due to the uncontrollable supply of commodities (including man-made, natural, economic environment, etc.), the prices of commodities themselves are more volatile. Buyers and sellers of some commodities hope to lock in future prices to avoid the risk of future price fluctuations. This is the original intention of futures trading. The futures market not only facilitates the operation of business by all participants, but also actually balances the unstable supply and demand in the market and avoids the ever-changing prices from causing losses to buyers or sellers.
Hedging operations can be carried out between the spot and futures markets, that is, hedging or arbitrage can be carried out. For example, merchant A holds a large amount of euros and does not expect to use them within a year. If the spot euro-dollar exchange rate is 1.3, and the futures price in 12 months is 1.28, merchant A can choose to sell in the spot market and buy euros to be delivered in 12 months at 1.28 to carry out forward arbitrage. For another example, merchant B holds a large amount of corn due to a good harvest. Since crops cannot be stored for a long time, merchant B can choose to sell in the spot market, but in order to ensure future supply, he can also buy Wang rice in the futures market to be delivered in the next few months.
Because spot and futures belong to two different markets, there are certain differences between spot prices and futures prices in essence.
All financial products traded on margin carry a high degree of risk to your capital. They are not suited to all investors and you can lose more than your initial deposit. Please ensure that you fully understand the risks involved, and seek independent advice if necessary.