Crypto Academy Week 3 Homework Post for [@besticofinder] : SPOT TRADING and MARGIN TRADING

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In regards to lesson 3: How to spot trade? Everything a beginner needs to know... Posted by @besticofinder on the steemitCryptoAcademy- this post is an homework task for the lesson.

Homework Task 3
You need to do your own research and create an article discussing following topics,
(1) Explain Spot Trading and Margin Trading
(2) Discuss the advantages and disadvantages of Spot Trading and Margin Trading

Spot Trading vs Margin Trading

Spot Trading and Margin Trading are two different techniques used by traders when buying or selling of commodities (e.g cryptocurrencies). The choice of technique to adopt is at the traders discretion.

Spot Trading

Spot Trading as the name implies means trading ( buying and selling) at a spot (current) price. Spot Trading is executed in spot market. The spot market is an avenue that brings the buyer and seller together to trade or exchange commodities at a particular time. The buyer and seller trade at the current price during the time of transaction, and the payment and delivery is done instantly or within two working days.
In spot trading, the buyer sells at the market prevailing price (spot price) and the buyer must be willing to pay the price. The spot price is determined by average bids of sellers as well as average offers from buyers.

The Spot Trading is instantaneous; which means at the point of transaction, the seller must posses the commodities to be delivered and the buyer must posses cash to pay in exchange for the commodities, otherwise there would be no trading. For instance, you can approach the spot market to buy steem worth of $1000. However at the time of demand 1 steem is worth $2. Thus you'll get 500 steem which is equivalent to the cash you offered at that time.

Margin Trading

Margin trading give the trader or investor the opportunity to buy commodities worth more than what he own as capital. In other words, margin trading allows you to borrow funds in order for you to access a trade that demands a capital greater than what you have.

In margin trading, the trading is done with loan. The trader borrows the capital in order to trade. The trader invests a percentage of the total capital as a collateral. This collateral (percentage) places the trader on a margin in ratio to the total capital invested. The borrowed capital (loan) is called leverage. For instance, you have $1000 and you wish to trade worth of $5000. In order to meet the trade, you place your $1000 in margin at 1:5. thus your margin is 20℅ and your leverage is $4000. The outcome of this is that you earn based on the $5000 invested and not the $1000 you own. This means your potential earning increased by 5times.

Why Choose Spot Trading

Advantages: In Spot Trading, is easy to excecute transactions and manage risks involved. You don't need a prior plan or thorough study before trading, you are good to go as long as you are okay with the spot price. It also gives the opportunity hold on to get better deals if you're dissatisfied with the current spot price.
Disadvantages: In spot trading, you're limited to trade only what you have or own and consequently a limited return.

Why Choose Margin Trading

Advantages: In margin trading, you have a potential of earning larger profit due to the leverage obtained thereby placing you at a higher trading position (I.e you profit is amplified)
Disadvantages: there is a high risk of loosing the whole investment easily when things go bad. Once you loose beyond your percentage margin, you loose your owned capital an you're out of the trade.

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Thank you