Spot Trading and Forward Trading Key Difference

Trade at today’s price or lock in a future deal—your choice shapes your profit.
Discover how Spot and Forward Trading really work.

We can trade in two ways

SPOT TRADING

Spot Trading or Cash Trading is when a purchase or sales is made directly and immediately from the market.

 

SPOT MARKET

To buy the underlying asset at the spot you have a pay out of the total spot price today. Meaning that if you have a bakery shop and you need sugar (a commodity, as a raw material) today to protect yourself against the fear of an increase in the price of sugar in future when you might need it.

FORWARD TRADING

Forward Trading is where two parties agrees to trade an asset at a future date, at a predetermined price.

FORWARD MARKET

Buying the underlying asset through a forward makes you enter a contract (legally binding) to purchase the same underlying (commodity – sugar, in this case) at a predetermined price at a later date decided today. You might have to pay a small amount margin money while entering this forward contract (derivated). However, this amount will be much smaller than paying the entire amount. Also, you will get the sugar at the pre determined price irrespective, if the price increases or decisions in the future.

Examples

On 23.12.2024 Sugar price Rs 50 per kg.

3 months later sugar price may be Rs 45 per kg or Rs 55 per kg

Buyer will get the sugar at predetermined price Rs 50 per kg and 3 month later too due to the forward contract. 

Meaning that if the price of sugar after 3 month is 10% more, you will still have the benefit of buying it at the predetermined price. Also, if the price of sugar after 3 months is 10% less, you will still have to buy the sugar at the same predetermind price. Therefore, the derivative here plays a significant role in protecting you against any price fluctuations of sugar in the market. This is very important for those who have high exposure to such price fluctuations. It is important for them to purchase.

Now when you buy a commodity that you need after 3 months you will also have to store it which will include some storing costs. When you buy using forward contracts, because you do not receive physical delivers you do not have to incur any storage costs too.

The Difference between Spot Trading Vs Forward Trading

SPOT MARKET

  1. Financial assets are traded
  2. Trade executed immediately
  3. Entire amount needs to be paid upfront. The entire transaction is closed on the spot itself with cash and actual goods exchanging hands.
  4. Commercial banks, brokers, customers of commercial banks and brokers

FORWARD MARKET

  1. These are more financial contracts and not assets in themselves
  2. Executed on a specific future date.
  3. Only margins need to be paid at the time of entering into the contract.
  4. Hedgers speculators, arbitrageurs, margin traders. Beyond this they are commonly used to manage risks

Purpose of Derivative

Derivatives are used for a varied range of purposes by differnt traders. Covering their uses, we have a simplified list for you before.

To reduce risk (uncertainty) in the future.

To profit from the movement of prices of various assets.

To hedge various positions in the market.

To benefit from increased leverage when trading.

Frequently Asked Question (FAQ)

What exactly is spot trading?

Buying or selling an asset for immediate delivery and settlement at the current market price.

Yes. Lower risk, no leverage, and no expiry-related pressure.

Yes. 100% funds or shares are required (unless broker provides limited margin).

Absolutely. It helps beginners learn price action, volume, and market behaviour.

A contract to buy or sell an asset at a future date at a pre-agreed price.

Yes. High risk due to leverage and volatility. Losses can exceed capital if unmanaged.

Not recommended. Beginners should master spot trading first.

  • Professional traders
  • Hedgers (businesses, institutions)
  • Experienced investors

Depends on:

  • Risk appetite
  • Capital
  • Experience
  • Time commitment

“Start with spot trading, build discipline, then explore forwards cautiously.”

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