What is a Spot Trade?

A spot trade is a method of trading foreign exchange currency. Spot trades, also called cash trades, are foreign exchange trades with immediate delivery. The name spot trade came to be because this type of trade is generally made "on the spot." Some countries have laws that limit how long it takes for the delivery from a spot trade to reach the purchaser, often legally limiting the time between the trade and delivery to within one or two days. When a spot trade is made, the currency is sold at a special price called a spot price, which is a trading price specified for a foreign exchange trade involving immediate delivery of the purchased currency.

Foreign exchange trading, also called Forex, FX or 4X trading, is when investors buy currency from another country with the intent to profit from changes in the values of international currencies. With profit made from values rising and falling, buying and selling currency on the Forex market can seem somewhat similar to trading on the stock market. As the value of a currency can go up or down with changes in the market demand for the currency, Forex investors can make money by buying an undervalued currency and selling that currency when its value has gone up. Popular currencies that are frequently traded on the Forex market include the American Dollar, the Euro, the Yen and the Canadian Dollar.

Spot traders are essentially like the day traders who operate in the stock market. As day traders take advantage of short-term changes in the price of stocks, buying low and selling when the stock is high to make a profit on the price change, Forex spot traders quickly buy and sell currencies to profit from the price changes. In general, the Forex futures market is more regulated than spot trading, which can occur off the record and behind closed doors. Though it is easier for investors with less money to get into a spot trading market, this type of trading can be risky because an investor can suffer great financial losses if short-term changes in currency values do not go as he expected.

A Forex futures trade differs from a spot trade because the delivery times are much longer, usually around one or two months. In a Forex futures trade, an investor makes an agreement to buy a specified amount of foreign currency at a predetermined, agreed-upon price on a specific later date. Because the purchase is made in the future, successfully profiting from the purchase or sale of Forex futures requires an understanding of the currency's value and accurate prediction of the growth of the currency.