Spot Market

Spot Market

What is the spot market?

The spot market (also called the cash or physical market) is where financial instruments and commodities are bought and sold for immediate payment and near-term delivery. Commonly traded assets include equities, currencies, commodities, and some fixed-income instruments. The price at which an asset can be bought or sold for immediate delivery is called the spot price.

How it works

• Buyers and sellers agree on a transaction at the current market price; funds and the asset are exchanged according to the market’s settlement convention.
• Settlement timing varies by instrument: many stock trades settle on T+1 (one business day after the trade), while foreign exchange spot trades typically settle on T+2.
• Orders posted by market participants determine the spot price. In liquid markets, the spot price can change rapidly as orders are filled and new orders arrive.

Note: A non-spot transaction (forward or futures) fixes a price now for delivery and payment at a later date.

Where spot trading occurs

• Exchanges: Centralized venues (e.g., stock exchanges) aggregate buy and sell orders and publish current prices and volumes. Exchanges can host both spot and derivatives trading.
• Over-the-counter (OTC): Direct trades between counterparties without a centralized exchange. OTC transactions can be spot or forward in nature and often allow customized terms. The foreign exchange market is a major OTC market.

Advantages and disadvantages

Advantages
– Reflects real-time market value — useful as the reference for derivative pricing.
– Often highly liquid for major assets, facilitating quick execution.
– Immediate delivery is available for those who need the physical asset or currency.

Disadvantages
– Physical delivery may be impractical or costly for many participants (e.g., taking delivery of physical commodities).
– Not ideal for hedging future production or consumption needs; forwards and futures are typically used for that purpose.

Example

A U.S. retailer needs euros to pay a German supplier offering a short-term discount. If the retailer accepts the current EUR/USD spot rate, she buys euros at the spot price. The FX spot trade settles in two business days, and she receives the currency to pay the supplier and secure the discount.

Practical uses

• Everyday purchases (gasoline, groceries, retail goods) are spot transactions: payment and delivery occur immediately.
• Businesses use the spot market to obtain physical goods or currencies needed now.
• Producers and consumers who need price certainty for future delivery typically use forwards or futures instead of spot trades.

Quick FAQ

• What does “spot” mean?
  “Spot” refers to settling a trade immediately—or on the market’s near-term settlement date—so the asset and cash exchange on the spot.
• What are spot market examples?
  Stock exchanges, the spot FX market, and commodity spot markets where physical goods are bought and sold for cash.
• How does spot differ from futures/forwards?
  Spot trades exchange the asset now; futures and forwards agree on a price now for delivery and payment at a future date. Futures are standardized and exchange-traded; forwards are customizable and usually OTC.

Bottom line

The spot market is the mechanism for buying and selling assets for immediate payment and delivery. Its prices (spot prices) serve as the foundation for derivative pricing and reflect current supply and demand. Spot markets are essential for immediate needs and physical delivery, while derivatives markets are better suited for hedging future exposure.