The spot market, also known as the “cash market” or “physical market”, is a public financial market where financial instruments or commodities are traded for immediate delivery. It gets its name from the fact that transactions are settled “on-the-spot”, meaning instantly or within a short period of time.
Hence, in a spot market, buying and selling of goods or securities are done instantly. The exchanges happen in real time, and the payment happens “on the spot”. Some examples of spot markets can include markets for produce, precious metals, energy and currencies.
1. How does the spot market differ from the futures market?
The key distinction between a spot market and a futures market lies in the timing of the delivery. In a spot market, the trade transaction is carried out instantly, but in a futures market, the delivery happens at a specified date in the future.
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2. What is spot price?
The spot price is the present price at which a commodity, security, or currency can be bought or sold for immediate delivery and payment.
3. Is trading on the spot market risky?
As with any form of trading, spot market trading entails risks. These can include price volatility, liquidity risks and counterparty risks. Traders should manage their strategies wisely and consider their risk tolerance.
4. Does the spot market only deal with commodities?
No, not at all. The spot market can involve a wide variety of financial instruments, including commodities, currencies, and securities.
5. What is settlement risk in the spot market?
Settlement risk, also known as delivery risk, can occur if one party to the trade delivers the asset but the other party does not deliver the payment. This is a risk inherent to the spot market.