What is the Spot Market?
The spot market is a type of market in which goods or services are traded immediately for cash. In the business world, the spot market is frequently used for goods and services that are perishable or that have a short shelf life.
In the spot market, buyers and sellers will make a deal, and the transaction is done “on the spot” – i.e., completed immediately. There is no waiting period for the product to be delivered.
Spot market in the financial markets
The spot market is commonly referenced in futures markets, especially as it pertains to commodities.
When someone references the spot market, it means the current price that can be transacted in for the current month’s (or period’s) delivery.
For instance, when people say something like “oil is $100 per barrel” they are often referencing the spot market. The price in other months, up to many years down the road, is often called term pricing.
The shape of the entire curve is often called the futures term structure.
The following chart is an example of the price curve of WTI crude oil. It shows a relatively high spot price, but with futures prices up to $40 lower in future years.
(Source: Interactive Brokers)
The shape of the curve is called backwardation, where the spot price is above prices in the future.
Spot market vs. Futures market
The spot market differs from the futures market in that, with the latter, delivery is at a later date.
In spot markets, settlement is often conducted two working days after the transactions, which is often dubbed T+2. This means that the exchange of cash and/or the commodity must be done two working days after the trade date.
However, the trade appears completed to each side (cash and asset in the hands of the other), which is done through a series of credit agreements between buyers, sellers, brokers, and clearinghouses.
How and where does the spot market exist?
A spot market can be done either “over the counter” (OTC) or through an exchange.
OTC markets exist off-exchange and can be done between any two consenting parties.
An exchange is an official hub where trades take place in a fair and orderly way and prices are continuously updated and efficiently disseminated to the public for securities, commodities, or instruments trading on that exchange.
Spot markets can operate wherever the infrastructure is available to conduct trades.
Spot market in the business world
In the business world, the spot market is popular because it offers quick and easy transactions. Buyers and sellers can complete a deal without having to go through a long approval process.
Additionally, there are no credit checks or other financial requirements that need to be met. This makes the spot market an attractive option for businesses that need to buy or sell quickly.
However, the spot market also has some disadvantages. Prices can be volatile and it can be difficult to find a stable or reliable price, depending on the market.
Additionally, spot market deals are usually for small amounts of “excess” or available product, which can make it difficult to get the best price.
Conclusion
The spot market is a type of market in which goods or services are traded immediately for cash.
It is popularly used for goods and services that are perishable or that have a short shelf life. In the spot market, buyers and sellers meet to make a deal, and the transaction is completed immediately.
There is no waiting period for the product to be delivered. The spot market in the financial markets is commonly referenced when futures prices are discussed. A spot market exists wherever the infrastructure exists to conduct the transaction.
In the business world, the spot market is popular because it offers quick and easy transactions.
Additionally, there are no credit checks or other financial requirements that need to be met. This makes the spot market an attractive option for businesses that need to buy or sell quickly.