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What is the difference between Spot and Futures markets?​

​​​​​The Spot Market and Futures Market are two types of financial markets where assets are bought and sold, but they differ in how and when transactions are settled.

1. Spot Market
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  • Definition: A market where financial instruments (stocks, commodities, forex, or cryptocurrencies) are bought and sold for immediate delivery.
  • Settlement: Transactions are settled "on the spot" or within a few days (T+2 for some stocks).
  • Price: Determined by current supply and demand (also called the spot price).
  • Example: If you buy 1 Bitcoin (BTC) at $42,000 on a spot exchange, you get the BTC immediately after payment.
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2. Futures Market
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  • Definition: A market where contracts are traded to buy or sell an asset at a predetermined price on a specific future date.
  • Settlement: The actual asset or cash settlement happens at a later date.
  • Price: Based on speculation, demand, and expectations of future supply and demand.
  • Leverage: Futures contracts often allow traders to use leverage, meaning they can control larger positions with less capital.
  • Example: A trader agrees to buy 1 BTC at $42,000 in a Bitcoin futures contract expiring in one month. Regardless of BTC's price at that time, the contract will be settled at $42,000.

​The key differences between Spot Markets and Futures Markets are:
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1. Settlement Timing
  • Spot Market: Transactions are settled immediately (or within a few days, e.g., T+2 for stocks).
  • Futures Market: Settlement occurs at a future date as per the contract terms.
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2. Ownership
  • Spot Market: You own the actual asset (e.g., stocks, commodities, or cryptocurrencies).
  • Futures Market: You do not own the asset; instead, you hold a contract to buy/sell it in the future.
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3. Price Determination
  • Spot Market: The price is based on current supply and demand (spot price).
  • Futures Market: The price is based on expectations of future supply and demand and includes factors like storage costs and interest rates.
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4. Leverage & Margin
  • Spot Market: Typically requires full payment upfront (except for margin trading in stocks).
  • Futures Market: Allows high leverage, meaning traders can control larger positions with a smaller initial investment (margin).
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5. Risk Level
  • Spot Market: Lower risk since you own the asset outright.
  • Futures Market: Higher risk due to leverage and price fluctuations before contract expiration.
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6. Expiration
  • Spot Market: No expiration; you can hold assets indefinitely.
  • Futures Market: Contracts have a fixed expiration date, after which they are settled or rolled over.
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7. Use Cases
  • Spot Market: Used for immediate buying and selling (e.g., buying gold, stocks, or crypto).
  • Futures Market: Used for hedging risks (e.g., farmers locking in crop prices) and speculation (e.g., traders betting on price movements).
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