| Equities | Stocks, exchange-traded products, equity futures |
| Fixed-Income | Bonds, T-bills, fixed-income futures |
| Foreign Exchange | Currencies, currency futures |
| Commodities | Metals, energy, livestock, agricultural products, commodity futures |
Futures trades in contracts that have an expiration date. They are also sometimes called spot trades since the expiring contract means that the buyer and seller will be exchanging cash for the underlying asset immediately.
The current price of a financial instrument is called the spot price. It is the price at which an instrument can be sold or bought immediately. Buyers and sellers create the spot price by posting theirbuy and sell orders. In liquidmarkets, the spot price may change by the second or even within milliseconds, as orders get filled and new ones enter the marketplace.
A non-spot, or futures transaction, is agreeing to a price now, but delivery and transfer of funds will take place at a later date.
Spot Market Trading
On Exchanges
Exchanges bring together dealers and traders who buy and sell commodities, securities, futures, options,and other financial instruments. Based onall the orders provided by participants, the exchange provides the current price and volume available to traders with access to the exchange.
- The New York Stock Exchange (NYSE) is an example of an exchange where traders buy and sell stocks for immediate delivery. This is a spot market.
- The Chicago Mercantile Exchange (CME) is an example of an exchange where traders primarily buy and sell futures contracts. This is a futures market and not a spot market. Although, CME does have some cash markets as well.
Over the Counter (OTC)
Trades that occur directly between a buyer and seller are called over-the-counter. A centralized exchange does not facilitate these trades. The foreign exchange market (or forex market) is the world's largest OTC market with an average daily turnover of $7.5 trillion as of April 2022.
In an OTC transaction, the price can be either based on a spot or a future price/date. In an OTC transaction, the terms are not necessarily standardized, and therefore, may be subject to the discretion of the buyer and/or seller. As with exchanges, OTC stock transactions are typically spot trades, while futures or forwardtransactions are often not at the spot price unless they are nearing expiration.
The word spot comes from the phrase on the spot where in these markets you can purchase an asset on the spot.
Advantages and Disadvantages of Spot Markets
Advantages
The spot price is the current quote for immediate purchase, payment, and delivery of a particular commodity. This means that it is incredibly important since prices in derivatives markets such as for futures and options will be inevitably based on these values.
Spot markets also tend to be incredibly liquid and active for this reason. Commodity producers and consumers will engage in the spot market and then hedge in the derivatives market.
Disadvantages
A disadvantage of the spot market is taking delivery of the physical commodity. If you buy spot pork bellies, you now own some live hogs. While a meat processing plant may desire this, a speculator probably does not.
Another downside is that spot markets cannot be used effectively to hedge against the production or consumption of goods in the future, which is where derivatives markets are better suited.
Pros
Real-time prices of actual market prices
Active and liquid markets
Can take immediate delivery if desired
Cons
Must take physical delivery in many cases
Not suited for hedging
Example of a Spot Market
Let’s say an online furniture store in Germany offers a 30% discount to all international customers who pay within five business days after placing an order. Danielle, who operates an online furniture business in the United States, sees the offer and decides to purchase $10,000 worth of tables from the online store.
Since she needs to buy euros for (almost) immediate delivery and is happy with the current EUR/USD exchange rate of 1.1233, she executes a foreign exchange transaction at the spot price to buy the equivalent of $10,000 in euros, which works out to be €8,902.34 ($10,000 ÷ 1.1233). The spot transaction has a settlement date of T+2, so Danielle receives her euros in two days and settles her account to receive the 30% discount.
What Does Spot Market Mean?
Spot markets trade commodities or other assets for immediate (or very near-term) delivery. The word spot refers to the trade and receipt of the asset being made on the spot.
What Are Examples of Spot Markets?
Many commodities have active spot markets, where physical spot commodities are bought and sold in real-time for cash. Foreign exchange also trades in the spot currency market where the underlying currencies are physically exchanged following the settlement date. Delivery usually occurs within two days after execution as it generally takes two days to transfer funds between bank accounts.Stock markets can also be thought of as spot markets, with shares of companies changing hands in real time.
What Is a Spot and Forward Market?
A spot market is where spot commodities or other assets like currencies are traded for immediate delivery for cash. Forward and futures markets instead involve the trading of contracts where the purchase is to be completed at a later date.
What Is the Difference Between Spot Markets and Futures Markets?
Forwards and futures are derivatives contracts that use the spot market as the underlying asset. These are contracts that give the owner control of the underlying at some point in the future, for a price agreed upon today. Only when the contracts expire would physical delivery of the commodity or other asset take place, and often traders will roll over or close out their contracts to avoid making or taking delivery altogether. Forwards and futures are generically the same, except that forwards are customizable and trade over the counter, whereas futures are standardized and traded on exchanges.
The Bottom Line
Financial markets are vast and take on different characteristics. The spot market is a type of financial market where buyers and sellers exchange assets for cash immediately. The price at which these assets are traded is called the spot price—the price for immediate sale. This is one reason why this market is also called a cash or physical market. Assets traded in the spot market include equities, fixed-income products, currencies, and commodities.
