What it means
When you buy shares through a broker, change currency at a bank or buy a barrel of oil for delivery next week, you are dealing in the spot market. The word "spot" simply means "on the spot", so the price is the price at this moment.
Spot prices are set by supply and demand. Because they reflect the latest information, they move as news comes in, and they act as a reference point for many other prices, including those of futures and options.
Different assets settle on different timetables. Many currency trades settle two business days later, shares in many markets settle a day or two after the trade, and physical commodities can take longer because goods have to be moved, stored and inspected.
The settlement period is a market convention, so check the one for your market. Businesses use the spot market whenever they need an asset immediately.
An airline might buy fuel on the spot market for an urgent shortfall, and a manufacturer might buy a currency to pay a supplier. The benefit is flexibility, while the drawback is exposure to whatever the price is on that day.
The alternative is to fix a price in advance using a forward or futures contract. Many firms use a mix, buying most of their needs under fixed-price contracts and topping up on the spot market, which gives some certainty without locking in the entire quantity.
A final nuance is that spot prices can differ from futures prices for the same asset. The gap, called the basis, reflects storage costs, interest rates and expectations, and watching it helps traders and businesses decide whether to buy now or later.
In practice
Real-world examples.
Example
An exporter receives payment in euros and sells them for dollars on the same day through her bank. The exchange takes place at the spot rate, and the dollars arrive in her account two business days later.
Example
A small oil refiner has an unplanned shutdown at a supplier and buys 20,000 barrels of crude on the spot market to keep production going. It pays whatever price is current, which turns out to be higher than its contract price.
Example
A private investor buys 100 shares in a listed company through an online broker at the price shown on screen. The purchase settles within the standard period for that market, and the shares appear in his account. He pays a small commission to the broker, which is a normal part of the cost of trading.
Formula
Calculation
Cost of a spot purchase = quantity x spot price
A food manufacturer needs an extra 500 tonnes of sugar at short notice. The spot price is $600 per tonne. Cost = 500 x 600 = $300,000. If the manufacturer had pre-bought the same sugar under a contract at $560 per tonne, the cost would have been 500 x 560 = $280,000, so the spot purchase cost $20,000 more.Case study
Seen in the real world.
Meridian Plastics is an illustrative, fictional manufacturer that uses 1,000 tonnes of resin a month. For years it bought 80% of its needs under fixed-price contracts and the remaining 20% on the spot market for flexibility.
When a competitor unexpectedly shut down, demand surged and spot resin prices rose from $1,200 to $1,500 a tonne. Meridian's 200 tonnes of spot purchases cost an extra 200 x 300 = $60,000 that month, while its contracted 800 tonnes were unaffected.
The illustrative lesson is that the spot market is useful for flexibility but exposes the buyer to price swings. Meridian kept its 80/20 mix, and its finance director added a spot price alert so purchasing could delay non-urgent buying when prices spiked. The team also reviewed the split each year, since a business with more stable demand could safely take a larger share of its needs at spot prices.
Watch out
Common mistakes.
- Assuming "spot" means the money moves instantly, when settlement usually takes one or two business days.
- Treating the spot price as a forecast of what the price will be later, when it only shows the price today.
- Relying entirely on the spot market for essential supplies, which leaves the business fully exposed to price spikes.
Questions
People also ask.
What is the difference between the spot market and the futures market?
In the spot market you pay and receive the asset almost immediately, whereas in the futures market you agree a price now for delivery on a set future date.
Who sets the spot price?
Nobody sets it directly, as it emerges from the buying and selling of all market participants and changes continuously during trading.
Is the spot market only for commodities?
No, it covers currencies, shares, bonds and commodities, since any asset traded for near-immediate delivery is traded on a spot basis.
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