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What Is Spot Market? – UniFirstMortgage

by shagun Saini
What Is Spot Market

Here we will understand What is spot market? Where you can exchange commodities, currencies, and securities. So, here we will be understanding What is spot market? As well as Spot Price with some features of spot market with Spot market example and the types of spot market that exists. We will also understand How does spot market work? What is spot market freight? Spot market vs forwarding market as well as Spot Market vs Futures Market and some Advantages of Spot Markets.

So, let us first understand What is spot market?

What Is Spot Market?

The spot market refers to a market where financial instruments are traded as well as exchanged for immediate delivery such as commodities, currencies, and securities. Here, in the spot market, both perishable and non-perishable goods are traded and delivered. Here, the term Delivery denotes the physical exchange of a financial instrument or the commodity that even has a cash consideration. You can also call the spot market the physical market as here the exchange of goods or commodities takes place instantly and involves cash value too.

The purchases are done by cash at the current prices fixed by the market that is in opposition to the price at the time of distribution. Crude oil is a relevant example to quote for the spot market, which is sold at existing or current price but supplied later.

Some of the different names for spot markets are a locomotive market, cash market, or effective market. And sometimes also referred to as “liquid markets” or “cash markets”.

So, the spot market definition can be quoted as a market where financial instruments are traded as well as exchanged for immediate delivery such as commodities, currencies, and securities.

Spot Price

The price quoted for the spot market for purchasing or for the purpose of sale on or in the spot market is called the spot price. Both buyers and sellers build up their spot prices by quoting them.

Features Of Spot Market

Some of the common features of the spot market are as follows:

  • The price quoted for the spot market for purchasing or for the purpose of sale on or in the spot market is called the spot price.
  • The spot market has divergences with the futures market, as the delivery of the commodity purchased is done at a later date.
  • Some commodities in the spot market are sold at spot prices and therefore are transported at a future date that can be extended up to a month too.
  • Mostly the transport and logistics sector involves the spot market.
  • Immediate delivery in the spot market is done for the trading of Financial instruments.

What Is The Spot Market?

The spot market is a market where financial instruments are traded as well as exchanged for immediate delivery such as commodities, currencies, and securities. The purchases are done by cash at the current prices fixed by the market that is in opposition to the price at the time of distribution. Crude oil is a relevant example to quote for the spot market, which is sold at existing or current price but supplied later.

Types Of Spot Market

Below I have mentioned the 2 types of spot markets:

  1. Exchange-Traded

An exchange-Traded market is also known as an organized market as here the commodity is traded on an exchange by using the current price or current fixed price.

So, here in the Exchange-Traded spot market, we noted down the following features:

  • There is limited risk involved in comparison to trades executed over the counter.
  • There is a central place in an exchange where buyers and sellers meet to exchange commodities.
  • The spot rate is the rate at which exchange takes place or the trading of securities takes place.
  1. Over The Counter (OTC)

In Over counter (OTC) spot market trade is based on a contract basis that is done between two parties and follows guidelines as well as rules which are agreed in advance.

So, here in Over the counter (OTC) spot market, we noted down the following features:

  • A limited group of counterparties is involved in the trading of commodities.
  • Trades considered to be riskier than the trades.
  • Trade is usually carried out at the exchange rate.

How Does The Spot Market Work?

The spot market is a market where financial instruments are traded as well as exchanged for immediate delivery such as commodities, currencies, and securities. The purchases are done by cash at the current prices fixed by the market that is in opposition to the price at the time of distribution.

Here, securities are traded immediately as well as delivered in the market at the specified date. a “spot price” and a “futures or forward price” are also quoted in the market. Mostly, the transactions have a T+2 settlement date.

Spot Market Example

ABC Ltd owns a fabric business in America and is looking for suppliers dealing with decent superiority fabrics at a competitive rate. ABC Ltd looks in the international market and finds a Chinese supplier giving almost 40 % discount on bulk orders of over $ 10,000. The payment needs to be made in CNY, and ABC Ltd might save big if the current market rate for USDCNY is high.

ABC ltd notices that the current USDCNY rate is 7.03 but due to the discount offered it was quite economical.

  • USDCNY = 7.03
  • Purchase amount = $ 10,000
  • CNY amount = $ 10,000 * 7.03
  • CNY Amount= 70,300

So, the spot transaction was settled or made after 2 days (T+2) where ABC Ltd was able to make the payment and also avail a discount of 40 % which was saved by the company.

What Is Spot Market Freight?

A spot market freight involves the shipping cost involved in the spot market, and thus involves spot freight rates or say the price which a freight service provider offers to the shipper to move the product from one point to another.

Spot Market vs Forwarding Market

The spot market is a market where securities are traded immediately and the price is affected by the existing supply and demand, whereas in the case of the forwarding market securities are traded at a pre-determined price or a contracted price at a specified date in the future.

Spot Market vs Futures Market

Both Spot Market and the Futures Market are different as in the Spot Market the price is affected by the existing supply and demand, whereas in the case of the Futures Market is affected by the price of storage and future price movements. Moreover, the perishable or non-perishable goods also affect the spot market.

Advantages Of Spot Markets

Some of the advantages of the spot market are as follows:

  • The spot market is more flexible in comparison to the futures market as the spot market can be operated on lower volume.
  • The spot market is quicker where delivery is also prompt.
  • The spot market involves transparency while trading the securities as well as the exchange of cash.
  • There is the ease of trading involved for the trades.
  • The transfer of funds and ownership takes place immediately without involving much time.

FAQ

What Does Spot Market Mean?

The spot market is a market where financial instruments are traded as well as exchanged for immediate delivery such as commodities, currencies, and securities. The purchases are done by cash at the current prices fixed by the market that is in opposition to the price at the time of distribution. Crude oil is a relevant example to quote for the spot market, which is sold at existing or current price but supplied later.

What Is An Example Of A Spot Market?

ABC Ltd owns a fabric business in America and is looking for suppliers dealing with decent superiority fabrics at a competitive rate. ABC Ltd looks in the international market and finds a Chinese supplier giving almost 40 % discount on bulk orders of over $ 10,000. The payment needs to be made in CNY, and ABC Ltd might save big if the current market rate for USDCNY is high.

ABC ltd notices that the current USDCNY rate is 7.03 but due to the discount offered it was quite economical.

  • USDCNY = 7.03
  • Purchase amount = $ 10,000
  • CNY amount = $ 10,000 * 7.03
  • CNY Amount= 70,300

So, the spot transaction was settled or made after 2 days (T+2) where ABC Ltd was able to make the payment and also avail a discount of 40 % which was saved by the company.

How Does The Spot Market Work?

The spot market is a market where financial instruments are traded as well as exchanged for immediate delivery such as commodities, currencies, and securities. The purchases are done by cash at the current prices fixed by the market that is in opposition to the price at the time of distribution.

Here, securities are traded immediately as well as delivered in the market at the specified date. a “spot price” and a “futures or forward price” are also quoted in the market. Mostly, the transactions have a T+2 settlement date.

What Is The Difference Between A Spot Market And A Futures Market?

Both Spot Market and the Futures Market are different as in the Spot Market the price is affected by the existing supply and demand, whereas in the case of the Futures Market is affected by the price of storage and future price movements. Moreover, the perishable or non-perishable goods also affect the spot market.

Conclusion

Thus, by now we know What is  spot market? As well as Spot Price with some features of spot market with Spot market example and the types of spot market that exists. We will also understand How does spot market works? What is spot market freight? Spot market vs forwarding market as well as Spot Market vs Futures Market and some Advantages of Spot Markets.

The spot market is a market where financial instruments are traded as well as exchanged for immediate delivery such as commodities, currencies, and securities. The purchases are done by cash at the current prices fixed by the market that is in opposition to the price at the time of distribution. So, we have understood What is spot market?

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