Spot market happens when traders trade various financial instruments (like currencies, securities, and commodities) with an immediate exchange of cash. That is on contrary to future contracts that allow traders to trade the underlying asset at the future date.
Defining Spot Market
Some Traders call spot market as physical markets or cash markets. Those names come from the trades within the market that effectively and immediately swapped the assets. Within this market, both parties who make the asset transaction, like stocks and currencies, agree to trade right at that moment, even when the official transfer of funds may take time.
It is different from futures transactions, where the parties agree upon a price right now while making the transfer of funds at a later date. Yet, sometimes, the futures trades that are going to expire are sometimes also called spot trades.
When the futures to expire, the buyer and seller will immediately exchange the cash for the underlying asset.
The Spot Price
Spot price refers to the current price of a financial instrument in the spot market. On the other words, that is the price where traders can buy or sell an asset immediately.
Usually, buyers and sellers make the spot price by posting the buy and sell orders. That price can change in a second in the liquid market since the orders get filled and the new ones come to the market.
Spot Market and Exchanges
As we all know exchanges unite traders and dealers who are going to buy or sell various assets, like commodities, securities, options, and other instruments. Exchanges provide the current price and available volume to traders based on the orders made by the participants.
One of the examples of exchanges is the New York Stock Exchange (NYSE), which is also a spot market. While another example of exchange is the Chicago Mercantile Exchange (CME), but this exchange is a futures market.
