Spot (cash) Market

The spot market is something that a lot of people talk about without realizing it. In fact most people aren’t really sure what the spot market is. When you hear talk of the price of oil or of the dollar they are talking about the spot market price. These prices can affect a lot of other investments since they are used by almost all businesses.

The spot market is one in which contracts are settled immediately at the current price and delivery is expected right away. This usually applies to the commodity market or the foreign exchange market. In most cases the spot market is used by people and companies who actually need to buy or sell the product in question. If for example you are involved in a business that requires you to use copper you will likely want to buy the copper on the spot market so that you can take delivery immediately and get it for a known price. On the other hand the mining company that produces the copper will want to sell it right away so they will sell on the spot market.

Despite the fact that the spot market is intended primarily for producers and users there are ways that speculators can be involved. The most common would be the currency market. It is very possible for a trader to buy and take delivery of a currency right away and then hold it and wait for the price to rise. This is fairly common but it does have a downside since it will take away your ability to use leverage to increase your earnings. On the other hand it does significantly reduce your risk.

Trading on the spot market for commodities is a little bit more complicated since the average trader doesn’t actually want to take delivery of the commodity. Really unless you are in the business of making pork products you really don’t want a truck showing up at your door to offload your pork bellies. In order to get around this most commodities in the spot market are traded with a one month delivery period. This gives the trader the chance to sell the product to somebody else without having to take delivery.

The main way that the spot market affects most traders is that the price in the spot market will affect the prices in the futures market. Basically when you make a trade in the futures market you are gambling that the price will change in the direction you thought it would before delivery is required. Of course that price is going to be determined by the spot market. In reality it is a two way street since the number of futures contracts will affect the price of the spot market. If you are going to invest in commodities or currencies you need to understand how the spot and the futures prices affect each other.