Let’s break down the difference between spot trading vs leverage trading. This is a common question that many traders struggle to solve on their own simply because they don’t know the difference.
First, let’s pinpoint exactly what each of these trading styles means, and then we’ll compare them to see exactly how they are separated. After reading this article, you’ll have a basic understanding of both concepts and you’ll be able to choose which one suits you best.
I want to start by saying that this style of trading is increasing in popularity every year and it only makes sense to learn the difference between how the spot market and the leveraged market work.
Many traders discover that spot trading is not for them while others feel that trading with credit is too risky and they stay in the spot market.
This is a personal opinion for each individual and it all comes down to your risk appetite, style of investing, and perhaps your bankroll.
Usually, traders and investors will smaller accounts tend to lean towards leverage trading as they benefit from increased buying power.
The difference between Spot Trading and Leverage Trading
The true difference between the spot market and the margin market is the borrowed funds you receive from your broker while leverage trading.
In spot markets, you do not receive any extra funding from your broker and you can only trade with the money you have deposited into your account.
In the forex market, for example, you gain access to extra buying power through funds that the broker lends you in an automatic way which is the big difference.
When trading the spot market you are essentially buying or investing in the true underlying asset, for example, a stock or a cryptocurrency.
The opposite happens when you invest in these types of markets where you are only buying a contract that mirrors the price of the real asset.
Key takeaways
- Spot markets are traded with your funds only where you own the underlying asset.
- Margin-traded markets are traded with borrowed funds lent to you by your broker.
- Margin-traded markets are contracts that mirror the price of the real asset.
Of course, when investing through a broker that offers margin and credit you can choose to leave it at 1:1 leverage and only invest your own money.
Keep in mind though that some leveraged brokers will automatically add added buying power to your position size and the only way you control your risk is through the position size.
Why brokers offer margin to beginner investors is first of all to make more money through increased fees and higher risk.
Related: What is the broker benefit of giving leverage?
What is Spot Trading?
Trading the spot market means that you are trading the real market where you can buy an underlying asset and have ownership of that asset. For example, if you trade the spot stock market you essentially buy the real stock from the stockbroker and now you own a piece of the company.
The same thing goes for crypto spot trading, when you buy a cryptocurrency in the spot market it is yours to keep and you can add it to your wallet and send it out from the exchange at any time. The spot market gives you access to the underlying assets
Spot trading happens on stock exchanges that have access to the real market and the actual stocks that companies have issued. When you buy a stock in the spot market you invest in the real underlying asset and not a contract of some sort.
Another important aspect of the spot markets is that you are only allowed to trade with your capital and no borrowed funds are involved in this investing style. What you deposit into your investing account is what you have access to and that’s it.
When you search for Apple stock or Tesla stock on Google and you get the price chart you are looking at the spot market of the Apple and Tesla stock which represents the true price of both companies. T
To be able to buy these stocks you need to sign up for a spot market stock exchange and invest your own money. Spot trading is also considered to be a low-risk investment compared to leveraged products.
Pros and cons of spot market
| Pros | Cons |
| Direct ownership of the underlying asset | Difficult to profit for traders with small accounts |
| Lower risk | |
| A good way to start out for beginners |
How does it compare to using leverage?
Leverage trading is investing in the financial markets with borrowed money for added purchasing power and is always attributed to contract trading.
Derivatives are the most common contracts for margin-traded products and they include futures, options, swaps, and perpetual contacts that offer credit.
We’ve written a guide explaining how options give leverage where we explain how options provide increased buying power to traders.
This style of investing with leverage is seen as riskier for beginners but a very good way to increase profits if you know how to handle the market swings.
For example, if you were to trade stocks with leverage, such as Apple stock, you are not directly purchasing the Apple stock, you are buying a contract that reflects the real price of the stock.
Many leveraged products are more flexible and some investors prefer them over the real asset on a stock exchange.
To get access to these products you need to find either a leverage CFD broker or any other broker that offers derivatives contracts.
Futures exchanges and options trading platforms are other ways for you to access these products and increase your buying power.
In our guide to the best crypto leverage trading platform we review the top picks that we find are suitable for beginner and advanced traders.
Not all brokers and platforms will show you the added buying power they add to the contracts which makes it difficult for you to know your margin ratio and the risk tolerance of the position.
I recommend that you only trade with brokers and platforms that let you choose the ratio so you can control your risk.
Leverage in forex trading is a very common aspect that beginners use to both increase winnings and enable smaller accounts.
It’s worth mentioning that margin can both increase profit and loss and you could end up losing more than 100% with leverage if you are not careful.
Questions asked by other traders
The short answer is that spot markets offer no extra capital and let you trade the underlying asset in a less risky environment. It gives you access to borrowed funds to increase your buying power through derivatives contracts that are mirrored contracts of the underlying asset.
No, you either trade the spot market without margin or you trade a margin contract. But, you can trade a credit market with a 1:1 ratio which in essence is the same thing as trading without leverage.
The spot market is better for beginners for a couple of reasons. The risk is much lower and the fees are not amplified. Leverage is better for experienced investors who benefit from added purchasing power in good opportunities.
No, this is not possible. To short-sell a market, you need access to a leveraged trading platform that offers derivatives that offer short-selling. It is not possible to directly short-sell on a spot market trading platform. To learn more about this topic, read our guide: Short selling with leverage explained.
