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Futures prices vs spot prices: what are the differences?


MongiIG

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Spot prices and future prices have some things in common, but it’s essential to understand the differences between futures vs spot when trading any asset. Learn more in this guide.

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The difference between spot and futures: an overview

Spot and futures markets are two different ways to trade popular markets. The key difference is in their costs and expiries.

Spot markets (also known as cash markets) have low spreads but overnight fees. They don’t expire. Futures markets (also known as forwards markets) have higher spreads but no overnight fees. They expire on a set date in the future. This makes spot markets more attractive to day traders, and futures markets more attractive to longer-term traders.

With us, you can trade both spot and futures with spread bets and CFDs. Both are traded using leverage, which means you’ll put down a deposit (percentage of the value of the trade) to get started. This deposit is called margin. While margin lowers the cost of entry for your trade, it magnifies any profits and losses, which means you could lose more than your initial deposit. Read more about how to manage your risk.

What is a spot market and spot pricing?

A spot market is simply a market where you can buy or sell assets at the current rate – called the spot price. When trading the spot market, your position will be opened immediately, or ‘on the spot’.

For day traders, spot pricing is the most straightforward way to buy and sell an asset. You simply track the price over time, set your personal entry and exit point, and then buy at your desired price.

You can then hold on to your trade over the your chosen term, selling it only once the price has risen to a value that aligns with your trading goals. This is a popular strategy for day traders, as they can open positions with low spreads and no expiry date.

By trading on the spot market, you can gain exposure to shares, ETFs, indices, forex and commodities via derivatives such as spread bets and CFDs.

 

Spot trading example

Let’s say you expect the price of wheat to rise from its spot price of 885 over the next couple of days. You decide to open a spread bet, so you go to our platform and you see that the buy price is 884 and the sell price is 886. You could open a position to buy the market at £5 per point of movement. Every point of movement in the underlying market is now worth £5 to you – so if the wheat price rises by 20 points, you’d make a £100 profit but if it falls by 12 points, you’d make a £60 loss.

Alternatively, if you thought the wheat price would fall, you could open a spread bet to sell the market. If it did fall in price, you’d profit – but if it increased instead, you’d make a loss.

 

Sell/buy

What is a futures market and futures pricing?

A futures price is a quote for a contract that will be executed at a certain point in the future. The value is linked to the spot price, but whereas spot pricing is used to make immediate trades, futures pricing is used by traders who hope to make a profit by locking in the price now and finalising the sale at some point in the future.

A futures contract obligates the buyer and seller to trade a particular asset at a pre-determined price. This allows traders to take both long and short positions on their preferred market, based on their own price movement predictions, or market analysis.

When following futures prices, it is important to choose a trading platform that has deep liquidity. This will ensure that you can exit your trade or open a new position at the moment of your choosing.

 

Futures trading example

Suppose the current market level of US Crude – our WTI market – is £6500. We’re offering a sell price of £6497 and a buy price of £6503 due to the spread of six points, which we wrap around the underlying level.

You think the market will rise and decide to buy ten ‘Oil – US Crude (£1)’ futures CFDs. Each is worth £1 per point of movement, and expires at the end of the month. As CFDs are leveraged, you’ll only have to put down a 10% deposit to open this position. In this example, you’ll deposit £6503 for a position worth £65,030 [(6503 x 10 futures CFDs x £1 per point) x 10%]. Please note, however, that while leverage can magnify your profits, it can also amplify your losses.

Some of our oil futures CFDs are quoted in US dollars. In these cases, your profits or losses will be realised in dollar terms, and then converted into pounds at the prevailing rate of exchange

At the end of the month, the price of oil has risen by 50 points, up to 6550 – with a sell price of 6547 and a buy price of 6553. You decide to close your trade. As the price has risen, you’ll make a profit of £440 [(6547 – 6503) x 10 contracts x £1].

However, if the price of oil had declined by 20 points, you would have lost £260 [(6477 – 6503) x 10 contracts x £1] = -£260.

 

Future CFDs

Futures markets vs spot markets: three key differences

  1. Cost
  2. Timing and expiry
  3. Hedging

Cost

Futures prices are based on spot prices, but that’s where the connection ends. Futures prices are centred around the anticipated supply and demand for the underlying asset. For instance, if crude oil market production has stalled, this may indicate some scarcity in the future, which could see the futures price of crude oil spike.

Futures prices are also subject to a cost of carry. This fee covers the cost of storing the underlying asset until the point of sale, and it may also include any interest fees, or insurance.

When trading with us, you can expect lower spreads on spot markets, but you’ll pay overnight funding to keep a position open. Futures contracts, on the other hand, have higher spreads but no overnight fees.

 

Timing and expiry

The second difference between the futures market vs the spot market is the timing of the trade, and expiry. Spot markets are set up to allow trades to take place ‘on the spot’. The spot price relates to the current market value of a particular asset, and will go up or down in real time based on market demand.

By contrast, futures markets rely on contracts between traders, which determine the price of the underlying at a set point in the future. The price is agreed in advance of the trade, with the buyer hoping for a price rise over time, and the seller hoping to exit their trade with a profit.

Lastly, spot trades don’t have an expiry date, while futures expire at a set date

 

Hedging

Hedging means holding two or more positions at the same time with the aim of offsetting any losses from the first position with gains from the other. So, you could hedge a spot position with a futures position. For instance, if you believe that the price of gold is going to go down, you may wish to short your position on the gold markets by selling it on the futures market. If you believe the price of gold is going to rise, you might choose to buy and hold your position over time.

 

How to trade futures and spot markets

  1. Research spot and futures
  2. Open an account
  3. Choose your market to trade
  4. Choose between spot and futures
  5. Place your trade

 

Spread betting
CFDs

 

Before deciding whether you want to trade spot vs futures markets, you should ensure that you have a good understanding of the potential risks involved. You can learn more about how to trade spot markets and how to trade futures markets here.

The next step is to open a trading account with a platform that has deep liquidity and offers both spot market and futures market access.

 

CFD market Spot Futures
Shares Yes No
ETFs Yes No
Indices Yes Yes
Forex Yes No
Commodities Yes Yes
Bonds and rates No Yes

 

While some of the markets in the table above aren’t available for CFD futures, they might be available for spread betting futures or forwards within our platform. Here’s how our spread betting offering matches up. For ease of understanding, within our platform our futures and forwards offerings are technically the same.

Spread bet market Spot Futures/forwards
Shares Yes Yes
ETFs Yes Yes
Indices Yes Yes
Forex Yes Yes
Commodities Yes Yes
Bonds and rates No Yes

 

 

Then, you have to choose the market that you want to trade. It’s generally best to choose a market that you have some familiarity with, as any specific market knowledge can help you to make more informed decisions about your trades.

When choosing your market, be sure to take into consideration their volatility. Some traders enjoy the excitement of trading on volatile assets, while others prefer the lower-risk markets.

Finally, simply log into our trading platform and select a market. Choose to access either futures pricing or spot pricing, and then you can start buying, selling and trading as you wish.

Spot market vs futures market summed up

  • Spot prices relate the current value of an asset
  • Futures prices are linked to spot prices, but they may also include a fee for storing the trade until the deal is executed, at a point in the future
  • To trade on the spot market, simply open an account, choose your market and execute your trade
  • To trade on the futures market, open your account and decide whether you are going to buy or sell, then place your trade with an execution date at some point in the future
  • Open a live account to start trading spot markets or futures markets

 

Kathryn Gaw | Financial Writer, London | Publication date: Monday 02 August 2021. IG

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