Spot Trading

Spot trading is the purchase and sale of an asset at the present market rate for instant delivery on a set date. This guide will cover what spot trading and spot markets are, simple definitions of the underlying concepts, plus how they compare to futures strategies. See our list of the best spot trading brokers to get started:

What Is Spot Trading?

Spot trading is the buying and selling of financial instruments at the current market rate, which is also known as the spot price. This style of investing has instant delivery of the asset, making it a popular form of trading for short-term speculators like day traders. This is because the nature of the product means there is no expiry date and spreads are typically low.

Trading on the spot market, also known as the cash market, can be done directly with popular assets like stocks, forex and indices, alongside derivatives like CFDs and spread betting. With these derivatives, you do not need to own or deliver the underlying assets, instead deriving profits directly from movements in their values.

IG Index, for example, provides UK traders with the choice to spot trade both the underlying asset as well as CFDs and spread bets.

What Is The Spot Market?

The spot market is a financial marketplace where investors and speculators carry out spot trading, whether on equities or derivatives. It is a publicly available market that allows for instantaneous trading of assets and products between buyers and sellers. The underlying assets of these trades are usually transferred immediately, resulting in it being called trading “on the spot”.

While the two parties agree for instant delivery, the UK standard settlement periods still apply; for example, this is a T+2 settlement period for equities.

Many of the world’s most popular exchanges are spot markets, including:

• London Stock Exchange
• New York Stock Exchange
• NASDAQ

Spot Price Explained

The spot price is the current price of the financial asset. It is at this price that traders can immediately buy or sell the instrument in question.

The spot price is created by buyers and sellers posting their buy and sell orders to a broker/exchange. Every time an order gets filled, the spot price adjusts according to the next order. Therefore, very liquid spot trading markets can see their spot prices changing many times each second, while more illiquid markets could have substantial periods of inactivity.

Spot Trading Vs Futures Trading

Spot trading is often contrasted with futures. This is because spot positions are traded at the spot price for instant delivery (or the earliest possible delivery). Futures, on the other hand, agree on a price at the present but deliver the payment and underlying assets at a chosen later date. This means that you set a target price that determines the success of the position, while spot positions are successful simply by rising above (or below) the spot price.

While this may appear to make spot trading the superior approach, the associated fees over long periods can bring its potential profitability below futures over the long term.

Comparing Spot Trading Brokers

When it comes to spot trading, choosing the best broker is key to optimising your experience. Brokers offer different features, restrictions, benefits and disadvantages. Some allow for speculating upon direct equity assets while others are focused on CFD trading. Some may offer access to exotic stock exchanges or cryptocurrency derivatives that others do not, meaning you can access a greater range of investment opportunities.

Key areas to compare spot trading brokers include:

Assets

Online brokers have access to different exchanges and asset ranges. Most UK spot trading firms will have access to the London Stock Exchange but some may also grant access to foreign exchanges like the NYSE or TYO. Furthermore, some firms may offer the underlying assets directly from these exchanges, while others may trade CFDs or spread bets based on those assets.

The type of assets you want to speculate upon and the exchanges that sell these products will help narrow down which brokers you should choose from.

Trading Platforms

The trading platform is where you will spend your time placing orders and performing technical analysis. As such, it is one of the most important things to consider when choosing a spot trading broker.

Some platforms, such as MetaTrader 4 and MetaTrader 5, are designed to provide sophisticated and powerful tools to retail investors, allowing for complex technical analysis and the creation of automated trading bots.

Other spot trading brokers offer bespoke platforms, which are usually designed with ease of use and intuitive navigation in mind, making them more accessible to newer traders.

Fee Structure

Securing spot trading profits involves maximising returns and minimising costs. As such, you will want to find a brokerage that offers all of the features you need at the lowest cost possible.

How fees are designed varies between spot trading brokers. Some will have incredibly tight or even raw spreads but may also place a commission on opening/closing trade. Others may have wider spreads but with the benefit of zero commission. Moreover, some brokers charge deposit or withdrawal fees, while others may follow a freemium model, giving access to more features with monthly payments.

Muslim traders should check for specialised Islamic accounts offered by most major CFD brokers. These halal accounts forgo overnight swap rates, which can be debited or credited.

Regulation

Regulated brokers are much safer to trade with, especially if regulated by a top financial regulator, such as the UK’s FCA. Such firms will have better investor protection measures in place, such as negative balance protection and investor compensation insurance.

Unregulated brokers may entice traders with welcome bonuses and high leverage opportunities but bring additional risks.

Education & Research

Newer or less experienced traders may want to find a broker that offers competitive educational resources. Many top spot trading firms offer educational facilities on their platforms, websites or social media accounts. These typically include guides on how to trade on their platforms, glossaries of key terms, webinars or seminars on spot trading principles, strategy guides and more.

Research is another important factor to consider. Brokerage firms that offer insightful research resources will help in your understanding of the current financial landscape and an asset’s recent price movement, allowing you to make more informed investing decisions.

Spot trading brokers typically provide research through news articles, earnings reports, trading analyses, signals, financial analyses and analytical tools.

Advantages Of Spot Trading

• Real-time pricing
• Immediate delivery
• Simple to understand
• Typically high liquidity
• Lower minimum volumes
• Equities & derivatives supported

Disadvantages Of Spot Trading

• Physical delivery may be difficult
• Short positions only available with derivatives

How To Start Spot Trading

Spot trading is a straightforward approach to financial speculation and is popular because of this. It is simple to get started with this investing style as the concepts involved are more intuitive than some alternatives. Follow our step-by-step guide below to begin spot trading today.

1. Choose A Broker: Picking the right broker is important in ensuring your online spot trading experience is efficient and relatively secure. Above, we go through how to best compare spot trading brokers for your needs.
2. Set Up An Account: Registration processes vary but most require you to fill out personal details like your name, country of residence, nationality, phone number and email address. You may also have to complete a KYC section, typically providing some proof of identification.
3. (Optional) Open A Demo Account: This will let you practise spot trading on the broker’s platform using virtual funds. Using this, you can get accustomed to the platform and try implementing your investing strategy without risking real capital.
4. Deposit Funds: This can usually be done by going into your broker’s account portal and finding the Deposit tab. Here, you will need to choose your deposit method (e.g. debit/credit card, bank transfer, Neteller). Follow the steps and guide and provide the required details, including the amount you want to deposit.
5. Choose An Asset: Which asset you choose to speculate upon will depend on what you know and how much you want to research. The more you understand about an asset, the more informed your decisions will be. Even if you are looking to invest purely through technical analysis, understanding the background market of the asset in question will give you an advantage when developing your indicators and signals.
6. Place A Trade: Once you have decided upon an asset for spot trading, wait for the right time and then buy the asset. When it is time, go to the asset’s page or price chart and click the Buy asset button. Here, you will be able to choose the parameters of the order, including volume, order type and a stop loss limit. Once you are happy with the details of your order, confirm the transaction.
7. Close Your Position: Spot trades have no expiry date, so the asset can be held for as long as you want. Following your strategy, you will reach a point when it is time to sell the asset and realise your returns.

Spot Trading Order Screen – IG

Should You Start Spot Trading?

Spot trading is one of the most popular forms of investing as it is available for most financial assets and allows for immediate delivery of assets, funds and results. Most of the world’s leading exchanges, such as the LSE and NYSE, are spot exchanges. As such, understanding spot markets is key in the realm of online retail investing.

Use our ranking of the best spot trading brokers to start trading.

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