Loading the player...

What is 'Spot Price'

The 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 when accounting for exchange rates. In contrast to the spot price, a futures price is an agreed upon price for future delivery of the asset. 

Breaking Down 'Spot Price'

Spot prices are most frequently referenced in relation to the price of commodity futures contracts, such as contracts for oil, wheat, or gold. This is because stocks always trade at spot. You buy or sell a stock at the quoted price, and then exchange the stock for cash.

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.

Spot prices are in constant flux. While the spot price of a security, commodity, or currency is important in terms of immediate buy-and-sell transactions, it perhaps has more importance in regard to the large 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 want to deliver or take possession of the underlying asset. 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 price fluctuations.

The Relationship Between Spot Prices and Futures Prices

The difference between spot prices and futures contract prices can be significant. Futures prices can be in contango or backwardation. Contango is when futures prices fall to meet the lower spot price. Backwardation is when futures prices rise to meet the higher spot price. Backwardation tends to favor net long positions since futures prices will rise to meet the spot price as the contract get closer to expiry. Contango favors short positions, as the futures lose value as the contract approaches expiry and converges with the lower spot price.

Futures markets can move from contango to backwardation, or vice versa, and may stay in either state for brief or extended periods of time. Looking at both spot prices and futures prices is beneficial to futures traders. 

RELATED TERMS
  1. Contango

    Contango is a situation where the futures price of a commodity ...
  2. Spot Rate

    Spot rate is the price quoted for immediate settlement on a commodity, ...
  3. Spot Market

    A spot market is where trades are made for immediate delivery.
  4. Spot Delivery Month

    The spot delivery month, also known as nearby month or front ...
  5. Convergence

    Convergence is the movement of the price of a futures contract ...
  6. Carrying Charge Market

    Carrying charge market is a futures market where long-maturity ...
Related Articles
  1. Trading

    Combining Forex Spot And Futures Transactions

    The spot, futures and option currency markets can be traded together for maximum downside protection and profit.
  2. Trading

    The Future Is Now: All About Futures ETFs

    A new security class - futures ETFs - is gaining popularity. We tell you how futures ETFs work and offer tips.
  3. Tech

    Price Difference In Bitcoin Futures and Spot Markets Presents Arbitrage Opportunity

    Traders can make easy money by arbitraging the price difference in bitcoin futures contracts and spot market prices.
  4. Investing

    UNG: US Natural Gas ETF Performance Case Study

    Explore the performance of the United States Natural Gas Fund since 2012, including the influence of contango and backwardation on the fund's returns.
  5. Trading

    How To Lock In An Exchange Rate

    Currency risk can be effectively hedged by locking in an exchange rate through the use of currency futures, forwards, options, or exchange-traded funds.
  6. Investing

    A Quick Guide for Futures Quotes

    Here is a quick guide for reading and understanding futures markets quotes.
  7. Trading

    Beginner's Guide To Trading Futures

    An in-depth look into what futures are, and how you can build a solid base to begin trading them.
  8. Investing

    All About Liquid Commodities

    You might hear 'liquid commodities' and think of an auction, but they're actually a high-volume, fast paced financial product suitable for day traders.
RELATED FAQS
  1. What is the difference between trading currency futures and spot FX?

    The main difference between currency futures and spot FX is when the physical exchange of the currency pair takes place. Read Answer >>
  2. How is the price of a derivative determined?

    Learn how different types of derivatives are priced, including how futures contracts are valued and the Black-Scholes option ... Read Answer >>
  3. How do I set a strike price for a future?

    Find out why futures contracts don't have set strike prices like options or other derivatives, even though price change limits ... Read Answer >>
Trading Center