Spot trading occurs when investors purchase a security at its current market price, and the payment and delivery of that security happen immediately. These trades occur on over-the-counter (OTC) markets and major market exchanges such as the New York Stock Exchange (NYSE) and Nasdaq Stock Market.
Here’s a detailed definition of spot trade with examples, and an explanation of its meaning for individual investors.
Definition and Examples of Spot Trade
A spot trade is an investment transaction where immediate payment and delivery of the underlying investment occur. Investors often refer to the spot price, which is the price at which a spot trade is currently valued.
The spot price is also called the “cash price” and is updated in real time.
Spot trading is attractive to investors who day trade because they can own short-term positions without the expiration date a derivative contract would otherwise have.
For example, suppose you decide to invest in XYZ stock through your broker and submit a “market order,” where the payment occurs immediately and ownership of the investment occurs immediately. In that case, you are making a spot trade.
Types of Spot Trading Markets
There are essentially two different types of markets where you can make spot trades. They are the OTC markets and major market exchanges such as the NYSE or the Nasdaq.
OTC market trades of investment securities are not regulated by a third party. As a result, securities traded on OTC markets have lighter listing requirements and generally are riskier types of securities. In addition, investors can make spot trades on these markets where payment and delivery of the underlying investments happen immediately.
Major market exchanges include globally known markets such as the NYSE and the Nasdaq in the U.S., and other global markets such as the London Stock Exchange (LSE), the Shanghai Stock Exchange (SSE) and the Hong Kong Stock Exchange (HKSE). In all these major markets, investors can make spot trades for immediate delivery and payment.
Alternatives to Spot Trading
The opposite of a spot trade is a transaction in which immediate payment and delivery of the investment does not occur. Traders who wish to invest only at specific prices and at predetermined dates can invest in derivative contracts such as:
- Options contracts: Contracts that give the owner the right but not the obligation to buy a security at a predetermined price and date
- Futures contracts: Contracts to buy or sell a predetermined quantity of securities at a specific price and on a future date
Neither options contracts nor futures contracts are actual ownerships in the underlying security. Instead, they are contracts to purchase or sell securities at a later date between two parties.
Options and futures contracts are not considered spot trading because the prices and assets are not delivered immediately.
What It Means for Individual Investors
Most individual investors will be buying or selling securities based on the current spot price. So when looking at the stock market, the live prices you see are considered the “spot price” of that security.
However, more-technical traders who wish to trade options or futures contracts will be trading derivative contracts rather than submitting a spot trade at the current spot price. Knowing the difference between spot trades and alternative types of trades can help investors identify different investment opportunities and understand how to apply them to their portfolios.
- Spot trades are investment transactions in which payment and delivery happen immediately at current “spot” market prices.
- The two most common spot trading markets are the OTC markets and major exchanges such as the NYSE or Nasdaq.
- Alternatives to spot trading include trading options contracts or futures contracts.
- Understanding the different types of trades will help investors identify various trading opportunities for their portfolios.