Understanding the difference between spot and margin for newcomers to asset trading can be confusing. However, all your trades will fall into one of these categories, and it is better to choose your option intentionally to leverage all the benefits.
This article will detail the differences between each trade type, suggesting costs and benefits for each and which may be best for your unique requirements.
What is Spot Trading?
Spot trading is the simplest way to trade. You can think of it as buying something in a shop. You choose what to buy, give money to the person selling it, and then you own the asset.
There are hundreds of spot trading exchanges, and one of the most popular is Binance which uses a bidding and offer-based system to facilitate trades.
What are the Advantages and Disadvantages of Spot Trading?
Spot trading is great for beginner traders. It allows them to invest relatively small amounts of finance over long periods, taking the time to watch the market rise and fall. This trading method helps traders to step in and out as they see fit easily.
However, spot trading severely limits the gains that a trader can make. You can only trade the amount of your own capital that you can afford to risk. Spot traders will often see themselves making a good percentage return but will be frustrated that they could have acquired vast wealth with a greater initial investment.
What is a Margin Trade?
Margin trading is a more complicated form of trading. Instead of trading with your own funds, you borrow money from other third-party traders who gain an hourly interest. This interest will be based on the level of demand for loans to make a particular trade.
To protect your financers, you will need to back your trade with collateral which will be agreed upon based on the risk of the trade you are entering into.
What are the Advantages and Disadvantages of Margin Trading?
With margin trading, your capital at risk is only a minority of the total value traded. Instead, you must only cover the collateral and the hourly interest demanded by your financers. Therefore, margin traders benefit from much greater leverage and can multiply their initial investment many times over.
Margin trading also comes with much higher risks that should dissuade most beginner investors. You run the risk of much higher overall investors, a risk that your financers will be well aware of. If they are concerned about your trades, they reserve the right to issue a margin call. This will force you to liquidate and return funds.
Margin vs. Spot
As has been shown, spot trading is synonymous with low risk and low rewards, while margin trading involves higher risks and high rewards. It is up to each trader to weigh what they believe is best and make trades that will financially empower, not cripple themselves.
