Crypto Academy Week 3 Homework Post for @besticofinder: Spot Trading & Margin Trading
Hello steemians , I hope you all are doing very well.
In this post , I am here to submit my homework task 3 which I have carried out as required by @besticofinder, crypto professor.
The Question is!
- Explain Spot Trading And Margin Trading.
- Discuss the Advantages And Disadvantages Of Spot Trading And Margin Trading.
Now we discuss the topic in details.
What is Spot Trading?
The spot market is also called a financial market in which financial tools or goods are traded for instant delivery. It means the actual exchange of financial resources for cash. Therefore it is a financial market in which the supply of financial toold occurs when there is a transaction between the two persons, the buyer and the seller. And it never delays next date.
In the spot market financial tools are used instantly. Sometime the parties have already agreed in advance on the value of the underlying asset, and the actual transfer of the asset takes place at a next date, depending on the agreement. It is not a spot market since the delivery of the asset is instant. The price at which the transaction is settled is the price of the financial tool on the stock market is called the spot rate.
Trading on the spot market takes place anywhere. This is the price of the financial tool that is appearing on the market on the spot. The price is decided based on the orders published on the buyer-seller exchange. When the price paid by the buyer matches the seller's price and the relevant quantity is also available for transfer between both of them.
Advantages:
These are the advantages:
Spot contracts are easier to carry out as prices are transparent and there is no ambiguity with respect to the same.
The investors who purchase from spot market can opt to hold the securities until they find a better deal.
There is less capital investment since there is no obligation for a minimum investment as in case of futures contracts.
Disadvantages:
These are the disadvantages:
Spot market can be risky for investors in certain type of tools such as foreign currency. This is because prices are highly volatile and exchange rates change frequently in short duration of time.
What is Margin Trade?
Margin refers to the amount of equity an investor has in their brokerage account. "To margin or to buy on margin means, to use money borrowed from a broker to purchase securities. You must have a margin account to do so, rather than a standard brokerage account. A margin account is a brokerage account in which the broker lends the investor money to buy more securities than what they could otherwise buy with the balance in their account.
using margin to purchase securities is effectively like using the current cash or securities already in your account. The collateralized loan comes with a periodic interest rate that must be paid. The investor is using borrowed money and therefore both the losses and gains will be magnified as a result. Margin investing can be advantageous where the investor anticipates earning a higher rate of return on the investment than what he is paying in interest on loan.
In a general business context; the margin is the difference between a product or service's selling price and the cost of production, or the ratio of profit to revenue. Margin can also refer to the portion of the interest rate on an adjustable rate mortgage added to the adjustment index rate.
Adavantges:
Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of investment and the loan amount.
Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the loan from the broker.
A margin account is a standard brokerage account in which an investor is allowed to use the current cash or securities in their account as collateral for a loan.
Leverage conferred by margin will tend to amplify both gains and losses. In the event of a loss, a margin call may require your broker to liquidate securities
Disadvantages:
If the investor fails to pay up on time Example, within a few minutes, the broker will simply sell out the contract on behalf of the investor even without their will and any losses will be adjusted from the initial margin which had been held as collateral.
Special Thanks:
@besticofinder