What is a 'Spot Market'
The spot is a market for financial instruments such as commodities and securities which are traded immediately or on the spot. In spot markets, spot trades are made with spot prices. Unlike the futures market, orders made in the spot market are settled instantly. Spot markets can be organized markets or exchanges or over-the-counter (OTC) markets.
BREAKING DOWN 'Spot Market'
The spot market is also referred to as the “physical market” or the “cash market” because of the instant and immediate pace and movement of orders made as orders are made at current market prices. Market prices are unlike forward prices, which cover prices at a later date.
A spot trade is the purchase of financial instruments done on the spot or immediately. These trades are settled instantly and do not follow a set date in the future. Futures trades that are about to end in the current month may also be considered spot trades.
Organized Markets or Exchanges
Financial instruments like securities and commodities are bought and sold on exchanges that use, make or change the present market price of the product.
Exchanges are divided according to objects sold and type of trade. Under objects sold, exchanges are divided according to stock exchange, commodities exchange, and foreign market exchange. Under type of trade, exchanges are divided according to classical exchange and future exchange. Trades under classical exchanges are for spot trades, while future exchanges are for derivatives.
On one hand, exchanges have the benefit of managing liquidity. This lowers risks involved in the possibility of one party not completing the trade. Exchanges provide traders transparency and follow the current market price. On the other hand, OTC markets do not necessarily follow the common rules of an exchange market. Because of this, buyers and sellers get to create contracts that may be nonstandard. The prices of the products involved may also be unpublished. These trades are done on the spot as well.