Spot Market

The spot market is another type of commodity or securities market, one where both perishable and nonperishable goods are sold and delivered within a short amount of time. On the spot market, contracts also take effect immediately, and the spot market is also known as the physical or cash market. All purchases are settled in cash at the prevailing market price, as opposed to the price that's in effect when delivery takes place. For instance, crude oil is sold at the current price, and then delivered at a later time.

As we mentioned, commodities are often traded on the spot market. Commodities are goods which can be exchanged with other similar commodities, such as beef, grain, gold, oil, electricity and natural gas. Recently, a commodity market for things such as bandwidth and cell phone airtime have started, and to be sold on the spot market, ccommodities must meet stringent standards. Another huge spot market is the worldwide Forex market, where currencies are traded for those of other nations, and bought and sold in pairs. A common currency pairing on the world spot market is the US dollar and the British pound. If the pound makes gains against the dollar, investors will buy, but if it's weak, they sell. One benefit to currency trading on the spot market is the market's liquidity; traders can enter and exit as they wish.

The spot market has a few differences from the futures market; mainly in that prices on the futures market are affected by storage costs and the price movements in the future. With the spot market, prices are affected more by supply and demand, and are more volatile. Another thing that affects prices on the spot market is the perishable/nonperishable status of the commodity. A nonperishable commodity will sell at a price that takes into account price movements down the line, and a perishable commodity like fruit or grain will be more affected by the law of supply and demand.