What is the spot market and how to trade in it?

Brief content
Spot trading refers to the direct purchase or sale of financial instruments and assets such as cryptocurrency, forex, stocks or bonds. Delivery of the asset is often immediate. Spot trading takes place on exchange spot markets and over-the-counter markets (directly between traders). When trading the spot markets, you can only use the assets you own, with no leverage or margin.
Centralized spot exchanges enforce regulatory requirements, provide security, safekeeping and other services to facilitate trading. Instead, they charge a transaction fee. Decentralized exchanges provide similar services, but with the help of smart contracts on the blockchain.

IntroductionSpot trading offers an easy way to invest and trade. When investing in cryptocurrency, your first experience is likely to be a spot deal in the spot market, such as buying BNB at the market price and holding.
Spot markets exist for a variety of asset classes, including cryptocurrency, stocks, commodities, forex, and bonds. You are probably more familiar with the spot markets and spot trading than you think. Some of the most popular markets, such as the NASDAQ or the NYSE (New York Stock Exchange), are spot markets.

What is the spot market?The spot market is an open financial market where assets are traded instantly. The buyer buys the asset for fiat or another medium of exchange from the seller. Delivery of the asset is often immediate, but it depends on what is being traded.
Spot markets are also known as cash markets because traders make payments up front. Spot markets come in many forms, and third parties known as exchanges usually facilitate trading. You can also trade directly with other users on over-the-counter (OTC) portals. We'll cover that later.

What is spot trading?Spot traders try to profit from the market by buying assets in the hope that they will rise in price. They can later sell their assets in the spot market at a profit when the price rises. Spot traders can also open short positions in the market. This process involves selling financial assets and repurchasing them after the price declines.
The current market price of an asset is called the spot price. Using a market order on an exchange, you can instantly buy or sell assets at the best available spot price. However, there is no guarantee that the market price will not change during the execution of your order. There may also be insufficient volume to fill your order at the desired price. For example, if you placed an order of 10 ETH at a certain spot price, but you are only offered 3 ETH, then you will have to fill the rest of your ETH order at a different price.
Spot prices are updated in real time and change as orders are matched. Trading in the OTC spot market works differently. You can receive a fixed amount and price directly from another person without an order book.
Depending on the asset, delivery is immediate or usually within T+2 days. T+2 – date of agreement plus two business days. Traditionally, shares and stock assets required the transfer of physical certificates. The foreign exchange market also used to transfer currency by cash, bank transfer or deposit. Now, with digitized systems, delivery is almost instantaneous. However, cryptocurrency markets operate 24/7, allowing for instant transactions. P2P or OTC trading may take longer.

Exchanges and over-the-counter portalsSpot trading is not limited to one place. While most people will be spot trading on exchanges, you can also trade directly with other users without a third party. As already mentioned, these sales and purchases are known as OTC deals. Each spot market has its own differences.
Centralized exchangesExchanges are of two types: centralized and decentralized. A centralized exchange manages the trading of assets such as cryptocurrency, forex and commodities. The exchange acts as an intermediary between market participants and acts as a custodian of trading assets. To use a centralized exchange, you must fund your account with the fiat currency or cryptocurrency you wish to trade.
A serious centralized exchange must ensure smooth execution of transactions. Other obligations include compliance with regulatory requirements, KYC (Know Your Customer), fair pricing, security and customer protection. In turn, the exchange charges fees for transactions, listings and other trading activity. Because of this, exchanges can make profits in both bull and bear markets if they have enough users and trading volume.
Decentralized exchangesA Decentralized Exchange (DEX) is another type of exchange most commonly found in the cryptocurrency world. A DEX offers many of the same basic services as a centralized exchange. However, DEX matches buy and sell orders using blockchain technology. In most cases, DEX users do not need to create accounts and can trade directly with each other, without the need to transfer assets to the DEX.
Trading takes place directly from the trader's wallet via a smart contract. These are pieces of code on the blockchain that execute on their own. Many users prefer DEXs because they provide more privacy and freedom than a standard exchange. However, this requires a compromise. For example, lack of KYC and customer support can be a hindrance if you run into problems.
Some DEXs use an order book model, such as Binance DEX. A more recent development is the Automated Market Maker (AMM) model, such as PancakeSwap and Uniswap. AMMs also use smart contracts, but implement a different pricing model. Buyers use funds in the liquidity pool to exchange their tokens. Liquidity providers that provide funds to the pool charge a transaction fee to everyone who uses the pool.
OTC portalsIn addition, we have OTC trading. Trading in financial assets and securities is carried out directly between brokers, traders and dealers. Spot trading in the over-the-counter market uses a variety of communication methods to place trades, including telephones and instant messaging.
OTC trades have some advantages as they do not require the use of an order book. If you are trading an asset with low liquidity, such as small-cap coins, a large order can cause slippage. The exchange is often unable to fully execute your order at the desired price, so you will have to pay higher prices to execute the order. For this reason, it is better to use large OTC deals.
Note that even liquid assets like BTC can have slippage trades when orders are too large. Therefore, large BTC orders can also benefit from OTC trades.

What is the difference between spot and futures markets?We have already mentioned that spot markets make instant deals with almost immediate delivery. On the other hand, in the futures market, contracts are settled on a future date. A buyer and a seller agree to exchange a certain amount of goods at a certain price in the future. When the contract term approaches the settlement date, the buyer and seller usually settle in cash rather than deliver the asset itself.
You can learn more about futures in this article What are forward and futures contracts.

What is the difference between spot and margin trading?Margin trading is available in some spot markets, but it is not the same as spot trading. As we mentioned earlier, spot trading requires you to immediately purchase the asset in full and take delivery. And margin trading allows you to borrow funds with interest from a third party, allowing you to open larger positions. Thus, borrowing gives the margin trader the opportunity to earn more profit. However, this also increases the potential loss, so you must be careful not to lose all of your initial investment.

How to trade on Binance spotSpot trading on Binance is a simple process available after registering a Binance account. Let's take a look at the interface of the Binance exchange and learn how to execute a spot transaction. You can find the spot trading platform by hovering over the [Trading] tab and clicking [Classic] on the Binance home page.

You will see a trading interface that contains several different interesting sections.
1. Above you can see the cryptocurrency trading pair and other market information such as daily price change and volume.
2. The order book lists all open orders for the purchase and sale of an asset, sorted by price. Green orders are buy orders and red orders are sell orders. When you place a market order to buy an asset, you choose the lowest price offered. If your order still needs more volume to execute it, it will move to the next lowest ask price.
3. Here you will see a chart with historical price data that you can customize for yourself. Built into the window is TradingView, which provides you with a wide range of technical analysis tools.
4. In the upper right corner you can find different trading pairs. Here you can choose the cryptocurrency pair you want to trade on the spot market, and add your favorite pairs to your "bookmarks" by clicking on the small stars. Please note that you do not have to buy cryptocurrency with fiat. If you have other cryptocurrencies, you can also exchange them for other coins and tokens on the spot market.
5. In this section you will create buy or sell orders. You can see that it is currently in the [Spot] section. Below you can choose the order type [Limit], [Market], and [Stop-Limit].
Let's take a look at the simplest spot deal you can make - a market order. In our example, you want to buy $1,000 (BUSD) of Bitcoin (BTC). To do this, all you need to do is enter 1000 in the [Total] field and click [Buy BTC]. The exchange will immediately deliver the BUSD to the seller and you will receive $1000 worth of BTC (BUSD).

Advantages and disadvantages of spot marketsEach type of trading and strategy you will come across has its advantages and disadvantages. Understanding this will help you reduce your risks and trade with more confidence. Spot trading is one of the simplest, but it still has its strengths and weaknesses.
Advantages of spot markets1. Prices are transparent and depend only on supply and demand on the market. This aspect contrasts with the futures market, which often contains several reference prices. For example, the tick price on the Binance futures market is derived from other information, including the funding rate, the index price, and the moving average (MA) basis. In some traditional markets, the markup price may also be affected by interest rates.
2. Participating in spot trading is easy with simple rules, rewards and risks. When you invest $500 on the spot market in BNB, you can easily calculate your risk based on your entry and the current price.
3. You can "set the order and forget it". Unlike derivatives and margin trading, with spot trading you don't have to worry about liquidating or getting a margin call. You can enter or exit the deal whenever you want. You also don't need to keep checking your investments unless you want to make short-term trades.
Disadvantages of spot markets1. Depending on what you trade, spot markets can leave you with assets that are inconvenient to hold. Goods are probably the best example of that. If you buy crude oil on the spot, you will have to take physical delivery of the asset. In the case of cryptocurrencies, holding tokens and coins puts you in charge of their security. By trading futures derivatives, you can still access these assets, but pay in cash.
2. For some assets, individuals and companies, stability is most valuable. For example, companies wishing to operate abroad need access to foreign currency in the foreign exchange market. If they rely on the spot market, the planning of expenses and income will be very unstable.
3. The potential profit from spot trading is much smaller than from futures or margin trading. For the latter, you can use the same capital and trade larger positions.

Final thoughtsSpot trading in the spot markets is one of the most common ways of trading, especially for beginners. Although it's simple, it's always good to know more about the pros, cons, and potential strategies. Beyond the basics, you should consider combining your knowledge with good technical and fundamental analysis, and sentiment analysis.