Definition and Meaning
The spot market is a commodity or security market where goods, both perishable and non-perishable are sold for money and delivered immediately or within a short span of time. Contracts traded on a spot market are also in effect instantly. The spot market is also recognized as the cash market or physical market. The purchases are settled in cash at the current prices fixed by the market as opposed to the price at the time of distribution. An example of a spot market commodity that is often sold is crude oil. It is sold at the existing prices, and physically supplied later.
A commodity is basic goods, which is substitutable with other similar commodities. Some examples of commodities are grains, gold, oil, electricity and natural gas. Technology has entered the market with commodities such as mobile minutes and bandwidth. Commodities are standardized, and are essential to meet the specific standards to be traded on the spot market. The world spot market or foreign currency trading is a vast spot market. It is the simultaneous exchange of one nation’s currency with another. The way it works is through a stakeholder choosing a currency pair.
Types of Spot Market
The spot market which is also called the cash market is a financial market, in which the financial commodities and instruments are transacted for instantaneous delivery. It contrasts with a futures market in which distribution or delivery is owed at a later date. A spot market can be:
1. Exchange- It is also called an organized market where the security or commodity is traded on an exchange using and changing the current market price.
2. Over the counter (OTC) - In OTC, the trades are based on contracts which are done openly between two parties, and not subject to the guidelines of an exchange. The contract terms are approved between the parties and might be non-standard.
Spot Market v/s Futures Market
The spot market is different from the futures market in that the value in the futures market is affected by the price of storage and future price movements. In the spot market, prices are affected by the existing supply and demand, which inclines to make the prices more volatile. Another aspect that affects spot market prices is whether the commodity is perishable or non-perishable.