Business

What is Spot Forex Trading?

By Ryan Bradman | October 26, 2022

Table of Contents

Introduction

Many forex traders today find it difficult to differentiate between Spot Forex trading and other forms of trading, especially CFD trading. Some even suppose that there is no difference between them. Well, that’s a wrong assumption; as a huge difference exists between Spot Forex trading and other forms of trading like CFD trading and futures trading. While there is a legal claim for assets purchased under spot trading, there are no legal claims as such for assets purchased as CFDs. This is because the latter is only a contract for price difference entered into with the broker.

This work will therefore help you understand the difference between Spot Forex trading and CFD trading. You will also learn from this work how to carry out spot forex trading with easy-to-use forex brokers.

What is Spot Forex trading?

Spot Forex trading is the buying and selling of foreign currencies at the current market rate and having the purchased items delivered to the buyer afterwards, either physically or electronically. In spot trading, the goods purchased by the buyer are delivered to him at the current price when he purchased them.

How can one carry out spot forex trading?

Spot trading as we have seen involves the exchange of securities at the current market price. It can be carried out in two major ways such as electronically (through a broker) or physically where there is direct contact between the buyer and seller at the foreign exchange market. The electronic method also known as over-the-counter exchange market is the most popular form of forex spot trading today. Here, brokers play the role of middlemen in receiving the sold assets and delivering the same to the buyer. The prices of the assets sold through this means are regulated by the exchange market.

On the contrary, using the physical method entails that both the buyer and seller will meet at a given spot and exchange the purchased assets. For instance, trading commodities such as Crude oil and precious metal like gold using the method will warrant that the buyer will meet with the seller to receive the purchased gold or crude oil and the seller will have to collect his money from the buyer afterwards. The prices of the assets purchased here are decided between the buyer and seller and therefore not regulated.

What is the difference between Spot Forex trading and CFD trading?

The major difference between Spot Forex trading and CFD trading is that there is no delivery of purchased assets in CFD trading while Spot Forex trading involves the delivery of the purchased assets at the given market price either physically or electronically.

In CFD trading, the buyer is only interested in receiving the monetary equivalence of the asset bargained with the broker from his entry up to the exit point. This is unlike the Spot Forex trading where the buyer is interested in receiving the assets purchased either electronically or physically.

Advantages of Spot Forex trading

There is a legal ownership of assets purchased.
Very easy to execute transactions
The risk involved in spot forex market is minimal compared to CFD trading.
Offers exposure to the foreign exchange market.
Provides a meeting point between the buyer and seller.

Disadvantages of Spot Forex trading

Could involve the delivery of bulky assets purchased.
The value of assets purchased on the spot could fall over time.
Often it takes time to deliver the purchased assets to the buyer.
Commissions are charged when the purchased assets are to be delivered by a third party such as a broker.
Leverages are not offered for spot trading.