What is the spot market and how is spot trading conducted?

Summary
Spot trading refers to the direct buying and selling of financial instruments and assets such as cryptocurrencies, foreign exchange, stocks, bonds, etc. Asset delivery is usually immediate. Spot transactions occur in the spot market and are concluded through a trading platform or OTC market (direct transactions between the two parties). Transactions in the spot market can only utilize held assets, that is, leverage and margin cannot be used.
The centralized spot trading platform is responsible for supervising compliance, security, fund custody, etc. to improve the convenience of transactions and collect transaction fees in return. In contrast, decentralized trading platforms use blockchain smart contracts to provide similar services.

IntroductionSpot trading provides a convenient way to invest and trade. When you first invest in cryptocurrency, you'll most likely complete a transaction on the spot market, such as buying Binance Coin (BNB) at the market price and holding it for the long term.
Spot markets span different asset classes, including cryptocurrencies, stocks, commodities, foreign exchange, and bonds. Traders may be more familiar with the spot market and spot trading than they think. Some mainstream markets, including Nasdaq and NYSE (New York Stock Exchange), are spot markets.

What is the spot market?The spot market is a financial market open to the public and where assets are traded in real time. The buyer purchases the asset from the seller using fiat currency or other funding medium. Asset delivery is usually instantaneous, depending on the assets being traded.
The spot market is also called the "cash market" because traders pay money upfront. Spot markets exist in many forms, and a third party (called a "trading platform") typically facilitates transactions. You can also trade directly with others via over-the-counter (OTC) trading. We will introduce the relevant content in detail later.

What is spot trading?Spot traders purchase assets in the market and make profits based on the appreciation of the assets. After the price rises, they can sell the asset in the spot market to earn a profit, or they can choose to go short. Shorting requires selling existing financial assets and buying back more when prices fall.
The current market price of an asset is called the "spot price." By using market orders in the trading platform, you can buy and sell the assets you hold as quickly as possible at the most ideal spot price. However, there is no guarantee that the market price will remain unchanged during the order execution process. In addition, if there is insufficient trading volume, the order will not be filled at the expected price. For example, if a trader wants to buy 10 Ether coins at the spot price, but only 3 are on sale, the remaining Ethereum orders can only be filled at other prices.
Spot prices are updated in real time and constantly change as orders are matched. OTC spot trading works differently. You can agree a fixed quantity and price directly with the other party without using an order book.
Different assets have different delivery terms, which can be delivered immediately or usually within "T+2" days. “T+2” refers to the transaction date plus two business days. Generally, shares and equity involve the transfer of physical certificates. The foreign exchange market has also historically moved currencies through physical cash, wire transfers or deposits. Now with digital systems, asset delivery is almost instantaneous. Cryptocurrency markets operate around the clock, supporting instant transactions. Peer-to-peer trading or over-the-counter (OTC) trading requires longer delivery times.

Comparison between trading platform and OTC tradingSpot trading is not limited to a single platform. Although most people trade spot on trading platforms, traders can also skip the third party and trade directly with others. As mentioned earlier, this type of buying and selling activity is called "over-the-counter trading." Different spot markets have different characteristics.
Centralized trading platformTrading platforms are divided into two forms: centralized and decentralized. Centralized trading platforms manage the trading of cryptocurrencies, foreign exchange, commodities and other assets. The trading platform acts as an intermediary structure for market participants and is responsible for custody of trading assets. Before trading through a centralized trading platform, the account must be pre-deposited with sufficient fiat currency or cryptocurrency.
A formal centralized trading platform should ensure that transactions proceed smoothly. Ensuring regulatory compliance, KYC (identity verification), fair pricing, security and customer protection are also part of its responsibilities. In return, the exchange charges fees for trading, listings, and other activities. Therefore, as long as the user base and trading volume are large enough, the trading platform can make profits regardless of whether it is a bull market or a bear market.
Decentralized trading platformDecentralized exchanges (DEX) are another mainstream cryptocurrency trading platform. DEX provides many of the same basic services as centralized trading platforms. The difference is that DEX uses blockchain technology to match buy and sell orders. In most cases, DEX users can trade directly with other users without creating an account and without transferring their assets to DEX.​
Trading activity is completed directly between the smart contract and the trader’s wallet. Smart contracts are automatically executed pieces of code in the blockchain. Many users prefer to trade on DEX because compared to conventional trading platforms, DEX can properly protect privacy and increase transaction freedom. However, DEX also has shortcomings. For example, a lack of authentication and customer support can be very problematic when something goes wrong.
Some decentralized exchanges, including Binance, use the order book model. Automated market maker (AMM) models such as PancakeSwap and Uniswap are newly developed models. AMM also uses smart contracts but uses a different pricing model. The buyer uses funds from the liquidity pool to exchange the tokens they hold. The liquidity providers that fund the pool charge transaction fees to all users who use the pool.
OTCOn the other hand, we can use over-the-counter trading, also known as "off-platform trading". Financial assets and securities are traded directly between brokers, investors, and market makers. The OTC market organizes spot transactions through various methods such as telephone and instant messaging.
The advantage of OTC trading is that there is no need to use an order book. If trading low-liquid assets (such as small-cap tokens), large orders can result in slippery spreads. The trading platform is usually unable to complete the order at the price expected by the trader, so it has to raise the price to facilitate the order. As a result, larger OTC trades tend to fetch better prices.​
Note that even with liquid assets like Bitcoin, slippage can occur when orders are too large. Therefore, large Bitcoin orders can also profit from OTC trading.

What is the difference between spot market and contract market?As mentioned above, transactions in the spot market are instantaneous and delivery can be achieved almost immediately. In contrast, in a contract market, contracts are traded for delivery at a future date. An agreement in which a buyer and seller agree to trade a certain amount of a good at a specific price in the future. When a contract expires on the settlement date, buyers and sellers typically settle in cash rather than delivering assets.
To learn more about contracts, please read "What are forward and futures contracts?" 》.

What is the difference between spot trading and margin trading?Some spot markets offer margin trading, but it is different from spot trading. As mentioned earlier, spot trading requires traders to purchase and deliver the asset immediately in full. In contrast, margin trading allows traders to borrow funds from a third party and pay a certain amount of interest, thereby holding larger positions while increasing the possibility of making large profits. However, potential losses are also doubled, so traders must exercise caution to avoid losing their initial capital.

How to trade spot on BinanceOnce you register for a Binance account, you can easily conduct spot trading. Let’s take a look at Binance’s trading view to learn how to conduct spot trading. Log in to the Binance homepage, hover your mouse over [Trade] and click [Spot] to enter the spot trading platform.

The trading view is shown in the figure and consists of several areas of interest.
1. At the top, you can see cryptocurrency trading pairs and other market information such as daily price changes and trading volume.
2. The order book lists all open buy and sell orders for an asset by price. Green is a buy order and red is a sell order. When a trader places a market order to buy an asset, they choose to accept the lowest bid. If the order requires higher volume to be filled, it will move up to the next lowest ask price.​
3. The chart view here displays custom historical price data. The built-in TradingView in the window is equipped with a variety of technical analysis tools for use.
4. In the upper right corner, you can search for different trading pairs. Here you can select the cryptocurrency trading pairs you want to trade on the spot market, or click on the little star to favorite your favorite trading pairs. Note, you don’t necessarily have to use fiat currency to purchase cryptocurrencies. If you happen to own other cryptocurrencies, you can also exchange them for other tokens and currencies on the spot market.
5.Buy or sell orders can be created in this area. Currently shown is the [Spot] area. There are three orders to choose from in the area: [limit price], [market price] and [limit price stop loss].
Market orders are the simplest and most direct spot transactions. In the example, if the buyer wishes to purchase Bitcoin (BTC) worth $1,000 (BUSD), he enters “1,000” in the [Total] field, and then clicks [Buy BTC]. The trading platform immediately delivers $1,000 worth of BUSD to the seller, while the buyer receives the equivalent amount of BTC.

Advantages and Disadvantages of the Spot MarketEach trading type and strategy has its pros and cons. Understanding these contents can help reduce risk and increase trading confidence. Spot trading is a relatively simple method, but it has both advantages and disadvantages.
Advantages of spot market1. Prices are transparent and only rely on market supply and demand. In contrast, contract markets often contain multiple reference prices. For example, the mark price of the Binance Futures market is derived from funding rates, price indexes, moving average (MA) bases, and other information. In some traditional markets, marked prices are also affected by interest rates.
2. The rules, reward rewards and risk calculations of spot trading are simple and easy to understand, and the threshold for participation is low. Invest $500 worth of BNB in ​​the spot market and the risk can be easily calculated based on the bid price and current price.
3. No need to check frequently after placing an order. Unlike derivatives and margin trading, spot trading does not require worry about forced liquidations or margin calls. Traders can enter or exit a trade at any time. Except for short-term trading, traders do not need to check their investments frequently.
Disadvantages of spot market1. After trading in the spot market, you may get assets that are inconvenient to hold. The specific situation depends on the object of your transaction. Commodities are perhaps the best example. If you buy crude oil in spot form, physical delivery is inevitable. If trading cryptocurrencies, token and currency holders must ensure the security of their funds. By trading in contract derivatives, you can still trade the above assets, but the settlement method changes to cash.
2. For some specific assets, individuals and companies, stability is crucial. For example, a company that wants to expand overseas markets needs to obtain foreign currency in the foreign exchange market. If you rely on the spot market, your balance of payments will be very unstable.
3. Compared with contract or margin trading, the potential profit of spot trading is much less. Larger positions can be traded using equal capital plus leverage.

SummarizeSpot market trading is the most common trading method, especially suitable for beginners. Although simple, traders can benefit from understanding its pros, cons, and potential strategies. In addition to the basic points, knowledge reserves should also be comprehensively combined with technical analysis, fundamental analysis and sentiment analysis, and careful analysis and judgment should be made.