Spot Market - Explained
What is a Spot Market?
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Table of ContentsWhat is a Spot Market?How Does a Spot Market Work?Spot PriceSpot Market and ExchangesSpot Market and Over-the-CounterKEY TAKEAWAYS
What is a Spot Market?
In the spot market, financial instruments or commodities are traded for cash and delivered at the instant it was sold. A spot market is otherwise called the cash market or physical market, this is a place where a financial instrument is traded, the delivery of financial instruments is made after cash has been paid for the products. A spot trading is different from futures contracts where commodities or financial instruments are delivered at an agreed future date.
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How Does a Spot Market Work?
Spot markets are public financial markets where cash is exchanged for assets, commodities or other financial instruments. In most cases in the spot market, transfer of funds between the buyer and seller of commodities might not be at the instant the trade occurs, but both of them agree to a right now trade. Although the futures contract does not qualify as spot trades since the underlying assets are delivered at an agreed future date, there are some exceptions. If the futures contract is at its expiration, it may be called a spot trade given that the buyer and the seller exchange cash for an asset at that spot.
The current market price of an asset, commodity or financial instrument is called the spot price. This is the price payable by a buyer when purchasing a financial instrument. In a spot market, traders agree to the price of commodities right now and the delivery of the commodities takes place right now. A non-spot market is the opposite of a spot market, in this market, traders agree to the price of the asset or commodity right now but the delivery takes place at a later date. The current price of financial instruments vary from one market to another, market factors also influence the change in the current price. In a liquid market, for instance, an inflow of orders in the market can cause a change to the spot price.
Spot Market and Exchanges
Spot trades can occur on exchanges, exchanges are trade platforms where sale and purchase of securities, assets, futures contracts and other financial instruments take place. Popular exchanges include the New York Stock Exchange (NYSE), the American Stock Exchange (ASE), the Chicago Mercantile Exchange (CME) and others. However, not all stock exchanges feature spot trading, for instance, in NYSE, traders buy and sell stocks and delivery of stocks are made at the spot, this is a spot market. In CME, on the other hand, futures contracts and exchanged by traders.
Spot Market and Over-the-Counter
An over-the-counter (OTC) trade occurs directly between a buyer and a seller without any intermediary or middle channel. In the type of trade, spot trade can occur, given that buyers and sellers can make contacts to exchange trade for assets right now. To a large extent, trade agreements are made at OTC based on the discretion of the trader. The largest OTC market in the world is the foreign exchange market, where no centralized exchange exists between buyers and sellers of securities. In an OTC trade also, price is agreed between buyers and sellers using a spot price or a future price (date). This means that both spot trade and futures contract trade can occur on over-the-counter trade.
Here are some important points to know about the spot market;
- A spot market is a market where financial instruments are traded for immediate delivery, cash for commodities are also paid at the instant.
- Ordinarily, a spot price, futures or forward price can be quoted for an asset. A non-spot market or a futures contract is the opposite of a spot market.
- A spot trade can occur at the over-the-counter market or in an exchange market.
- In any of these markets, the price of commodities is agreed right now but delivery is made at a later date.
- A spot market is otherwise called a cash market or physical market. T+2 settlement date is a common feature of most spot market transactions.