Spot Price

Loading the player...

What is the 'Spot Price'

A spot price is the current price in the marketplace at which a given asset such as a security, commodity or currency can be bought or sold for immediate delivery. While spot prices are specific to both time and place, in a global economy the spot price of most securities or commodities tends to be fairly uniform worldwide. In contrast to spot price, a security, commodity or currency's futures price is its expected value at a specified future time and place.

BREAKING DOWN 'Spot Price'

In the financial markets, spot prices are most frequently referenced in relation to the price of commodity futures contracts, such as contracts for oil, wheat or gold. A futures contract price is commonly determined using the spot price of a commodity, expected changes in supply and demand, the risk-free rate of return for the holder of the commodity, and the costs of transportation or storage in relation to the maturity date of the contract. Futures contracts with longer times to maturity normally entail greater storage costs than contracts with nearby expiration dates. For example, on May 14, 2016, the spot price for wheat was $4.78 per bushel, the July 2016 futures price was $4.90 per bushel, and the December 2016 futures price was $5.22 per bushel.

Spot prices tend to be subject to extreme volatility. While the spot price of security, commodity or currency is important in terms of immediate buy-and-sell transactions, it perhaps has more importance in regard to the multitrillion-dollar derivatives markets. Options, futures contracts and other derivatives allow buyers and sellers of securities or commodities to lock in a specific price for a future time when they expect to make a transaction. Through derivatives, buyers and sellers can partially mitigate the risk posed by constantly fluctuating spot prices.

Futures contracts also provide an important means for producers of agricultural commodities to hedge the value of their crops against future price fluctuation.

The Relationship Between Spot Prices and Futures Prices

The difference between spot prices and futures contract prices is usually significant. The most common relationship between spot prices and futures prices, referred to as a normal market, is one where futures contract prices are increasingly higher over time as compared to the current spot price. The higher futures prices reflect carrying costs such as storage, the additional risk posed by the uncertainty of future supply and demand conditions in the marketplace, and the fact that prices for goods generally tend to increase over time.

In an inverted market, futures prices are decrease in comparison with the current spot price. Inverted markets are most frequently caused by extreme demand pressures in the current marketplace that enable sellers to command premium prices for immediate sale and delivery.

RELATED TERMS
  1. Narrow Basis

    A condition found in futures markets in which the spot price ...
  2. Wide Basis

    A condition found in futures markets in which the spot price ...
  3. Forwardation

    A term used in pricing futures contracts. Forwardation is a ...
  4. Carrying Charge Market

    A futures market where contracts with maturities further into ...
  5. Convergence

    The movement of the price of a futures contract towards the spot ...
  6. Contango

    A situation where the futures price of a commodity is above the ...
Related Articles
  1. Investing

    What Does Spot Price Mean?

    Spot price is the current price at which a security may be bought or sold.
  2. Investing

    Understanding the Spot Market

    A spot market is a market where a commodity or security is bought or sold and then delivered immediately.
  3. Markets

    Crude Oil Prices: Comparing Future Price Vs. Current Market Price

    Discover the differences between oil futures market prices and oil spot market prices and what leads to the differences between the two.
  4. Investing

    Explaining the Spot Rate

    The spot rate is the immediate purchase price posted on exchanges for purchasing commodities, currency and securities.
  5. Markets

    What Does Contango Mean?

    Contango​ is when the futures price of a commodity is higher than the expected future spot price.
  6. Investing

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
  7. Markets

    Contango Versus Normal Backwardation

    It’s important for both hedgers and speculators to know whether the commodity futures markets are in contango or normal backwardation.
  8. Trading

    Futures, Derivatives and Liquidity: More or Less Risky?

    Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk.
  9. Managing Wealth

    How To Invest In Commodities

    Find out which futures, options or funds will be your perfect commodity portfolio fit.
  10. Trading

    Advantages Of Trading Futures Over Stocks (APPL)

    We look at the top eight advantages of trading futures over stocks.
RELATED FAQS
  1. How are commodity spot prices different than futures prices?

    Find out more about commodity spot and futures prices, how to calculate a commodity's futures price, and the differences ... Read Answer >>
  2. What are some securities that have spot rates?

    Learn about the types of assets that have spot rates, and understand how the spot rate is used to determine the fair market ... Read Answer >>
  3. How do commodity spot prices indicate future price movements?

    Find out more about commodity spot and futures prices, how to calculate commodity futures prices and how spot prices indicate ... Read Answer >>
  4. How can I calculate the notional value of a futures contract?

    Learn how the notional value of a futures contract is calculated, and how futures are different from stock since they have ... Read Answer >>
  5. What are common factors that affect a security's spot rate?

    Learn the common factors influencing the spot rate for an asset including the bid-ask spread and the forward term structure ... Read Answer >>
  6. What is the difference between a forward rate and a spot rate?

    Learn about spot and forward contracts, how spot and forward rates are used for spot and forward contracts, and the difference ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center