Reviewed by Aug 27, 2020| Updated on
What is a Spot Market?
A spot market is where financial instruments are exchanged for immediate delivery, such as commodities, currencies, and securities. Delivery, here, means cash exchange for a financial tool. In comparison, a futures contract is based on the delivery of the underlying asset at a future date. Over-the-counter (OTC) markets and exchanges may provide spot trading and/or futures trading.
Spot Market Explained
Spot markets are also referred to as "liquid markets" or "cash markets" because transactions are instantly and essentially exchanged for the commodity. While it may take time to legally transfer funds between the buyer and the seller, such as T+2 on the stock market and in most currency transactions, all parties agree to trade "right now."
A non-spot or futures deal is agreeing on a price now, but the distribution and transfer of funds will take place later. Potential deals in contracts that are about to expire are also sometimes referred to as spot trades since the expiring deal means the buyer and seller can immediately swap cash for the underlying asset.
The current price is considered as the spot price of a financial instrument. It is the price that an instrument can be immediately sold or purchased at. By posting their buy and sell orders, buyers and sellers build the spot price. In liquid markets, as orders are filled, and new ones enter the marketplace, the spot price may shift by the second.
Spot Market and Exchanges
Exchanges put brokers and traders who buy and sell commodities, shares, futures, options, and other financial instruments together. The exchange offers the current price and amount available to traders with access to the market on the basis of all orders made by participants.
The New York Stock Exchange (NYSE) is an example of an exchange where traders buy and sell stocks. This is a spot market. The Chicago Mercantile Exchange (CME) is an example of an exchange where traders buy and sell futures contracts; this is a futures market.