What is spot trading?

Spot trading is one of the simplest and most direct forms of trading. In spot trading, investors buy and sell assets at the current market price, with immediate settlement of the transaction. Spot trading has become particularly important in the cryptocurrency market, as it offers traders the opportunity to react flexibly to market movements. But what exactly is spot trading and how can you use it for your trading strategies? In this article, you will learn everything you need to know to get started with spot trading.

• Spot trading enables the immediate purchase and sale of assets at the current market price

• The transactions are settled directly, which means that ownership of the asset is transferred immediately

• There is no leverage in spot trading, which eliminates the risk of margin call obligations

• Spot trading is popular with cryptocurrencies, but can also be used on other markets such as stocks, commodities and forex (foreign exchange, currencies)

What is spot trading?

Spot trading refers to the immediate purchase and sale of assets or financial instruments such as cryptocurrencies at the current price on a spot market. The special feature of spot trading is the direct settlement of transactions, in which the asset immediately becomes the property of the buyer. This type of trading is popular due to its simplicity and flexibility.

The term spot trading comes from the fact that the transaction is executed "on the spot". In contrast to other forms of trading, the market price is used here, i.e. the current price of the asset at the time of the transaction. This makes spot trading a transparent and simple way to invest in cryptocurrencies, but also in stocks, currencies or commodities.

For traders , spot trading offers the advantage that the purchased assets are immediately available and can be traded flexibly or held for the long term. Traders can agree to trade in fiat currencies, i.e. conventional money such as euros or dollars, or in cryptocurrencies. It is also possible to exchange cryptocurrencies for money or other assets.

How does spot trading work?

In spot trading, transactions are executed immediately at the current market price and ownership of the traded asset is transferred immediately. This means, for example, that you can use a cryptocurrency such as bitcoin at the current price and store it immediately in your wallet. The price for buying or selling is called the spot price.

On spot markets, trading takes place directly between buyers and sellers without any delays. The price is based on the current supply and demand on the market. In contrast to other forms of trading, such as futures trading, there are no delivery delays or agreements for future transactions in spot trading. As soon as you place a market order, e.g. for cryptotrading, it is executed immediately and the purchased asset belongs to you. If you want to learn more about how orders work and are executed, read our guide to introducing orders and executions.

These are the steps for starting spot trading with cryptocurrencies:

1. Choose a crypto exchange or platform, e.g. Bitpanda

2. Register and set up an account

3. Go through personal verification 

4. Conduct market research and select cryptocurrencies specifically

5. Place the spot order

6. Monitor market developments in order to be able to react and execute new spot orders.

What is the difference between spot, future, margin and options trading?

Spot trading differs significantly from other forms of trading such as futures trading, margin trading and options trading. With our explanations you can distinguish spot trading from other forms of trading.

• In spot trading, the asset is bought or sold immediately at the current market price and ownership changes directly

• In futures trading, on the other hand, an agreement is made to buy or sell an asset at a later date at a fixed price 

• Margin trading allows traders to trade with borrowed money, which increases leverage but also increases risk 

• Options trading gives traders the opportunity, but not the obligation, to buy or sell assets at a certain price within a certain period of time

These different forms of trading offer different strategies and risks, with spot trading being particularly attractive for beginners and new traders due to its simplicity and transparency. Traders can react directly to market developments and remain in possession of cryptocurrencies or other assets in the long term.

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Spot trading in various markets

Spot trading is not only widespread in the cryptocurrency market, but also in other markets such as stocks, foreign exchange and commodities. On the spot market for stocks, for example, investors can buy and sell individual company shares directly at the current stock price. There is also a separate spot market for currencies, the forex market. Currency pairs such as the euro and US dollar or the euro and British pound are traded there in real-time. The forex market is the best known spot market and is used, for example, in every exchange office or when paying with your bank card abroad. In commodities trading, spot trading enables the immediate purchase of commodities such as gold, silver or oil.

In addition to the assets or financial instruments that can be traded, the spot markets also differ in terms of the type of market.

• Spot trading via centralised exchanges: In spot trading via centralised exchanges (CEX) such as Bitpanda, trading takes place via a platform that acts as an intermediary between buyers and sellers and often offers high liquidity and a user-friendly interface

• Over the counter trading (OTC): Over the counter trading (OTC) is direct trading between two parties without a central exchange in between, which is particularly suitable for large transactions in order not to influence the market price too much

• Spot trading via decentralised exchanges (DEX): In spot trading via decentralised exchanges (DEX) trading is carried out directly via smart contracts without a central authority, which means that investors retain full control over assets 

As these markets are all based on the principle of instant settlement, spot trading in any asset class offers a transparent and direct way to buy and trade assets at the current price.

Various trading strategies for spot trading

Various trading strategies can be used in spot trading, depending on your objectives and risk profile. 

• A popular strategy is Buy and Hold, where you buy assets and hold them for the long term in order to benefit from increases in value

• Day trading is suitable for traders who want to execute several transactions within a day and profit from short-term price fluctuations

• Swing trading is aimed at medium-term movements in which traders hold positions for several days or weeks

• Position trading, on the other hand, refers to holding assets for longer periods of time in order to make larger profits when the market price moves significantly

• Another popular strategy in spot trading is Dollar Cost Averaging, in which a fixed amount is regularly invested in an asset, regardless of the current market price, in order to profit from the average price in the long term and minimise the risk of market fluctuations

Each of these strategies can be applied flexibly in spot trading, depending on your trading strategy, experience and market analyses.

Advantages and disadvantages of spot trading

Spot trading offers several advantages that make it attractive to many investors. A major advantage is its simplicity and real-time execution: You trade directly at the current market price without considering complex mechanisms such as leverage or margin. Spot trading also offers high liquidity, as transactions are executed immediately and you take direct possession of your assets. Full ownership of the purchased assets can also be seen as an advantage, as you can manage them freely after the purchase. Furthermore, trading is  always flexible with spot trading, which means you can decide when to buy and sell.

On the other hand, there are also disadvantages. Spot trading is subject to the risks of price fluctuations as markets can be volatile, especially in the cryptocurrency market. In addition, spot trading lacks the leverage effect that enables potentially higher profits with other forms of trading, but also increases the risk. Also, you must pay the total amount of the capital you wish to invest at the time of the trade. In order to be able to react to the market, it is important to always be up to date and follow market developments.

How you could use spot trading 

One possible example of spot trading is buying a cryptocurrency when the price is low and selling it later at a higher price to make a profit. This strategy can be applied both in the short and long term. For example, if you follow the market daily and take advantage of short-term price fluctuations, this fits in with a day trading strategy.

Alternatively, you could buy a cryptocurrency and hold it for the long term in the hope of a significant rise in value, which is equivalent to a Buy and Hold Strategy. Spot trading is adaptable to your trading strategy, regardless of whether you are looking for short-term profits or long-term value growth.

Conclusion: High flexibility with spot trading

Spot trading offers you a flexible and direct way to buy and sell assets such as cryptocurrencies, stocks or commodities, while you retain full control over your transactions at all times. Whether you are pursuing long-term investment strategies such as buy and hold or want to react to short-term market movements, spot trading adapts to your goals. The ease of use and instant settlement make spot trading an attractive option for beginners and experienced traders alike. Spot trading has become increasingly important, especially for cryptocurrencies, and is a popular trading strategy.

Frequently asked questions about spot trading

Here, you will find answers and explanations to the most frequently asked questions about spot trading.

How can you make a profit with spot trading?

Spot trading generates profits by buying assets such as cryptocurrencies at a lower price and selling them later at a higher price. The difference between the purchase and sale prices represents your profit.

You must monitor the market price and market movements in order to find the right time to buy and sell. Since spot trading is based on current market prices, your success depends on your ability to recognise and take advantage of price fluctuations.

Is spot trading possible immediately?

Yes, with spot trading orders are executed immediately, as trading takes place in real time at the current market price. Trading is carried out "on the spot", hence the name spot trading.

As soon as you place a buy or sell order on a spot market platform, it is processed without delay, and the asset is transferred directly into your possession. This speed and transparency make spot trading a particularly attractive option for traders who want to react quickly to market movements.

Is spot trading suitable for beginners?

Spot trading is well suited for beginners as it is one of the simplest forms of trading. As no complex mechanisms such as leverage or margin requirements are involved, beginners can buy and sell directly at the current market price. 

Spot trading also provides a transparent overview of the market, making it easier to understand the value of an asset. Since spot trading takes place in real-time, beginners can quickly gain practical experience even without in-depth market knowledge.

Other topics relating to trading

Are you interested in the latest trading trends and classic trading strategies? In the Bitpanda Academy you will find a variety of guides and tutorials that will give you deeper insights into topics such as blockchain networks, crypto trading and much more.