The Difference Between Spot Trading and Futures Trading

The difference between spot trading and futures trading is easy to grasp once you understand the terms themselves.

• Spot trading: the assets are actually settled right away (a regular exchange)
• Futures trading: the assets are still settled, but the parties agree to do so at a specific price at a future date

Spot Trading Example

The most typical example of spot trading is buying assets on a regular stock market. For example, if you buy Samsung Electronics or Naver shares on Toss Securities, that is spot trading.

Likewise, buying Bitcoin, Ethereum, or other coins with KRW or USD on a crypto exchange counts as spot trading. In this case, the assets you buy are exchanged immediately and become yours. The same goes for selling.

Futures Trading Example

Futures trading is a 'contract' in which you agree to settle an asset at a future point in time. At first glance, you might wonder why anyone would sign a contract to trade at a specific price in an uncertain future.

However, futures trading offers special features that spot trading does not. The best-known one is leverage, and futures trading lets you do the following:

• Speculate and trade using leverage
• Profit in a falling market by short selling assets you don't own
• Hedge to minimize risk

Because of these features, futures trading is used by leverage traders who want bigger profits and by people who want to hedge or profit in a falling market. Of course, by the nature of leverage, it can also lead to bigger losses.

There is one concept here you should not miss. Since this is 'futures' trading, a 'settlement' still has to take place at a specific point in the future. Settlement here means actually exchanging the assets, just as in spot trading.

To sum up, a futures contract is a promise to make a spot trade at a specific price at a specific point in the future. People who take part in futures trading enter into these contracts hoping to earn more profit. In this way, futures trading is a financial product based on assets that are traded on the spot market, which is why it is called a derivative.