What is a Spot Market?

A spot market is a type of financial market where financial instruments and commodities are traded for immediate delivery. Here, the delivery refers to the physical exchange of financial assets or commodities, in consideration of cash. Spot markets are also known as cash markets or physical markets. This is because payments are processed immediately, and here the physical exchange of assets and securities takes place. Over-the-counter (OTC) markets and stock exchanges offer the opportunity for spot trading. This blog will help to understand “what is spot market”, by covering the spot market meaning, features, benefits, examples, and more.

What is Spot Price?

A spot price is the current price for the immediate purchase, payment, and delivery of a commodity, shares, assets, and other financial instruments. It is the sum of the amount buyers are willing to pay and the amount sellers pay for an asset or any financial instrument. The spot price is determined by demand and supply factors. However, other factors, such as prospects, can also affect the spot price of assets.   

Spot market prices may vary by region and circumstances. These prices are used in the spot market. Buyers and sellers in the spot market give up the chance of a better price in the future. However, there are circumstances when spot prices may eliminate the risk of an adverse price movement.

How are Spot Trades Settled?

Foreign currency spot contracts are one of the popular forms of spot trading. Issuance is typically made within two business days (T+2), and many financial instruments are settled on the next business day. Foreign currency trades typically settle two business days after the trading day, but the USD/CAD pair settles on the next trading day.

The spot price is issued by a trader who places a buy-and-sell order. New orders that enter the market are filled immediately. Thus, prices in a liquid market are constantly changing. Many other interest-rate instruments, such as mortgages and options, are also exchanged the next day.

Example of Spot Market Trading

Let’s consider a spot market example to understand spot market trading clearly.  

Suppose you want to buy gold right now. Here's how you do it in this case.

1. First, you look for someone selling gold. This could be a shop in town or an online store that sells gold bars or coins.
2. When you reach the dealer, you will find the current price of gold. This price changes all the time, just like stock prices.
3. If you are considerably in agreement with the price of gold, you pay the seller immediately. The gold is then sold immediately or delivered to you quickly.

Spot trading is similar to the above-mentioned process. This speed of buying and selling mentioned above makes spot trading a useful trading strategy. You get gold "on the spot" without waiting. It differs from other trading methods where you may agree to a price now but get the gold later.

• Spot trading is fast: You pay and you receive your product quickly.
• The price is current: You pay what gold costs right now, not a future price.
• Easy process: You find a seller, pay, and get your gold.

Types of Spot Markets

The following is the breakdown of types of spot markets:

Over-the-Counter (OTC)

Over-the-counter (OTC) is a place where buyers and sellers meet to trade with a two-way consensus. There is no third-party supervisor or stock exchange to manage sales. The assets being traded cannot be equated in quantity, value, or other terms.

Buyers and sellers therefore interact with all trade issues and deal with them on the spot. Prices on OTC markets may not be published, as trades are generally confidential. The exchange market is the most dynamic and well-known OTC market.

Market Exchanges

In an organized market exchange, buyers and sellers come together to set the price on which the assets are going to be traded, offering the available financial instruments and commodities. Trading can be done on an electronic trading platform or exchange. Electronic trading systems have made trading more efficient, and due to the volume of trading on some outlets, prices have been set instantly.

Exchanges deal with a wide range of financial instruments and commodities, or they may trade on specific asset classes. Trading is usually completed through exchanges acting as market makers. Assets traded on exchanges are standardized by exchange standards.

Features of Spot Market

Spot markets have unique characteristics that set them apart from other trading methods. This includes the following. 

• Spot price: The transactions use the current market price, called the spot price. This price reflects the asset's current value right now, not in the future. 
• Quick delivery: This is one of the effective features of spot markets; the asset is delivered fast, usually within two days. This is known as T+2, where T is the transaction day.
• Rapid payment: Payment is also done quickly in spot trading. If not, it also follows the T+2 rule, matching the delivery timing. 
• Real-time trading: Spot markets operate at the moment. Prices can change rapidly based on supply and demand. 
• Wide range of assets: Many kinds of assets and securities are traded on spot markets. This may include currencies, commodities like gold, metal, oil, and securities like bonds. 
• Transparency: Spot market prices are usually easy to find and understand. This feature makes the spot market accessible to many traders.

Advantages & Disadvantages of Spot Market

The following is the breakdown of the benefits and drawbacks of spot markets.

Conclusion
A spot market is where individuals trade things immediately. In spot markets, you follow through on the ongoing price, called the spot price. This price may change immediately based on what individuals need to trade. Spot markets are suitable for getting things quickly, usually within two working days. They deal with many different items, like finances from other countries, gold, or company stocks. One may use a secure share trading app to practice spot trading. Spot markets are easy to understand and use, making them appropriate for both new and experienced traders. This market helps people trade quickly and see current prices easily.