Difference between Spot and Futures in the Forex

Sometimes the terminology used in financial markets can be confusing and transactions in the Forex currency market certainly do not make things simpler. Sometimes a beginner trader hears terms like "spot" and "futures" without really understanding what they mean. Understanding these concepts is basic for any investor who has an interest in financial markets like the Forex as a means to increase their capital.

When talking about a spot transaction  in the market, the term refers to an operation that is done immediately. The spot price of a commodity, currency or stock is the price quoted for an immediate execution purchase / sale transaction, the settlement date of which is usually two business days after the date the transaction is executed. A spot Forex transaction is similar to saying I want to buy euros or US dollars right now. The spot price is fixed when the transaction is agreed. The spot market operates 24 hours a day and transactions can be made through a bank, via telephone or through the Internet.

Futures prices and contracts are slightly different. A Futures contract between two parties establishes or sets the price at the time the transaction is agreed upon, but in itself the whole transaction does not have to be executed or liquidated immediately. Both parties may agree that the transaction be made at a future date that is greater than the day or two that is regularly accustomed to trading in the Forex spot market.

When the date negotiated in the contract is reached, the transaction is made and the buyer makes the payment while the seller delivers the currency, raw material or stock according to the agreed conditions. In many cases the price of futures is fixed, but the delivery of the asset takes place three months later (in Standard Futures contracts). Futures are traded in centralized Futures markets such as the Mercantile Exchange (CME), although a high percentage of Futures transactions are made in OTC markets (Over The Counter). Unlike markets in which spot prices are traded (such as the spot Forex market), Futures markets usually have established trading hours as well as stocks in the stock markets. While there are also night markets for futures (markets in which Futures transactions can take place after the end of the regular trading session with these derivatives), they have very little liquidity and participants and are inaccessible to average investors.

The main difference between spot Forex trading and Forex Futures trading is the actual delivery of the assets. In futures, the price is paid when the contract is exercised or finalized and the currencies are exchanged. In the spot Forex market, the price is determined at the time the transaction is made, and the physical exchange of currencies is done immediately, at the precise moment of the trading or within a short time interval ( in most cases this period of time, also called the Spot Date, is two business days after the date of the transaction). However, many traders operating on Futures tend to close their positions before the expiration of the contracts.

In addition, trading in the spot Forex market provides access to a high level of liquidity and lower trading costs compared to Futures. Unlike these derivatives, spot transactions do not include commissions and other costs related to Futures transactions, such as NFA commissions (in the case of US-based brokers), which are generally passed directly to traders.