Stock Market vs. Futures

Basically, spot and futures are the two most popular types of trade in the cryptocurrency market. They differ conceptually from each other. In this article, we will help you understand the differences that exist between these two concepts.

What spot trading is?

Spot trading refers to the direct exchange of an asset between the seller and the buyer, with immediate ownership transfer upon transaction. Once the asset is transferred, it becomes the property of the buyer who has the right to use it at their own discretion.

This type of trading can be compared to a classic purchase of goods in the market. For example, you buy meat from a farmer at a price set by the farmer. The price is applicable at the time of selling the meat steak and once you have made the payment, the farmer formally hands over the steak to you. From the moment the steak is transferred into your hands, it belongs to you and you are free to do whatever you want with it.

Advantages and disadvantages of spot trading

Advantages:

this type of trading is the simplest and most straightforward, making it ideal for beginners in the market;
as this type of transaction implies direct ownership of the asset, the owner has the right to withdraw it from the exchange where the transaction was conducted, transfer it to "cold" wallets for storage, use it as a form of payment for goods and more;
lower risk level in trades due to the absence of leverage;
absence of the probability of liquidation of the trading deposit.

Disadvantages:

Limited profit potential, as in most cases, profit can only be obtained in an uptrending market when engaging in this type of trading;
inability to open short trades
Inability to use leverage and amplify potential profits.

What are futures?

Futures contracts are legal agreements that involve obligations, whereby two parties agree to exchange a specific asset at a specified price in the future. Purchasing a futures contract doesn't grant ownership rights to the asset.

If we go back to the primitive simplified analogy mentioned earlier of buying a steak from a farmer, the situation would roughly look like this:

Instead of the actual steak, you acquire a contract for it, which excludes your direct ownership right of the steak (you won't be able to take it outside the market where it was purchased). But this contract gives you the right to make something kinda "bet" that your steak (for example, by the end of the day) will become more expensive. In a scenario where all the steaks in the market are sold out and clever farmers advantage of the scarcity, will increase the prices of their remaining steaks, you have the opportunity to sell it back to the farmer or sell it to another buyer at a higher price, thereby making a profit. However, In the case where, for example, another 50 farmers with cheaper steaks arrive in the market during the second half of the day, it will lead to a decrease in prices due to the lack of competitiveness with the existing farmers' products on the market. Consequently, you would be forced to sell the goods at a lower price, resulting in a loss. Sooner or later, you will have to sell it because the contract prohibits you from taking the product outside of the market. Moreover, this contract also includes the payment of market's owner fee in the place where you acquired this steak. To prevent you from indefinitely holding onto the steak until it reaches a price that satisfies you, you will be charged a "rental fee" for it. The longer you hold the product in anticipation of price changes, the more money you will pay for it.

A key distinguishing factor for futures is the ability to place "bets" not only on the price increasing of an asset but also on its decrease. If you enter a short trade and the asset's price starts to decline, your profit will increase in proportion to the decrease in its value.

Futures contracts offer the option of using leverage.

This option entails the ability to use borrowed funds to increase one's potential profit. The mechanism of providing leverage by crypto exchanges is convenient to use and involves the automatic repayment of debt from the trader's available funds.

No matter what leverage you use or what borrowed capital you utilize, you cannot become a debtor to the exchange and lose more money than you have in your trading account.

Advantages and disadvantages of futures trading

Advantages:

you can profit from both uptrending and downtrending markets;
there is no need to hold the assets;
even trades with small changes in the asset's value can yield significant profits;
the ability to "unburden" your trading deposit and participate in a large number of trades simultaneously;
this is an effective way for risk hedging.

Disadvantages:

with the potential for increased profits also comes the risk of larger losses;
the complexity of understanding the nuances of this type of trading can be challenging for beginners.

What is the difference between spot and futures?

In asset ownership rights
In ability to trade both rising and falling markets
In ability to use leverage to enhance capital efficiency
In market liquidity, as monthly trading volumes in futures are measured in trillions of dollars

Which market is better to use?

It primarily depends on the trader's requirements and expertise. Spot trading is a simpler and less risky option, whereas futures provide significantly higher earning potential but come with a different level of risk. Regardless of the choice, every trader should have a clear and well-defined trading algorithm. Without such an algorithm, the predictability of your results will be like "in a casino" and there is a high probability that you will lose your trading deposit. It's just a matter of time.

Fortunately, for profitable trading, you don't need to absorb tons of information, to digest dozens books and try to apply it into practice. There's no need to extensively study all aspects of trading in order to eventually (but that's not for sure😀) learn how to trade profitably on your own. All you need to do is simply follow our mathematical algorithm to consistently generate profits.

The Profit Finder Indicator team executes 99% of all trades in futures contracts because this instrument allows for a large number of short-term trades with a short duration and a high probability of positive results.

For a comprehensive understanding of the key aspects of futures trading, our team has prepared a high-quality educational material that you can read through the link

For understanding the basic aspects of trading, we recommend you to explore our other educational articles. You can find a list of them by following the link