The spot market can be defined as a stock market, commodities and other assets where perishable and nonperishable goods are bought and sold for cash to be delivered immediately or within a short time interval ( Date Spot ). Contracts that are bought / sold in a spot market are immediately effective ( Spot Contracts ). This market is also known as the “money market” or “physical market”. The purchases are settled in cash at the current prices established by the market ( Spot Price ), instead of using the price at the time of delivery. One of the best examples of a commodity spot market with an asset that is bought and sold in large quantities is the gold market, In which this raw material is bought and sold at the current price for more or less immediate liquidation. On the contrary, an example of a commodity that is bought and sold at the current price (spot price) and is delivered physically later is crude oil. Today the best example of spot market is without a doubt the spot Forex market, which we will describe later.
Currently the term commodity applies to any commodity or commodity that is interchangeable with any other good of its kind. Some examples of commodities are precious metals like gold, silver and platinum, oil, natural gas, grains, meats and electricity. Now the term commodity is used much more widely than before (only applied to raw materials) and includes the technology that has entered this type of markets with commodities such as bandwidth and minutes of mobile telephony. Commodities are standardized and must meet certain requirements to be marketed in the spot market.
The spot market is not a specific location as it does not have a fixed location. It is a distributed market made up of a large variety of large and small participants from all over the world. In some cases, like the Forex, a spot market can have a global reach. Generally, participants in each of these markets share a set of rules and standards that define how to negotiate with each other with the assets and instruments offered by the market. These rules can include the maximum and minimum transaction size for example.
A spot market can be of two types according to your organization:
An organized and centralized market as an exchange dedicated to direct transactions with various assets and financial instruments such as stocks, currencies, commodities and others, which are traded under defined rules and standards and under greater regulations.
An OTC market (Over-The-Counter) , in which transactions are based on contracts made directly between two parties and are not subject to the regulations of a centralized and regulated market as in the case of the stock exchange. The terms of the agreement are agreed between the parties and may or may not be standardized. In addition, it may also happen that the price on the basis of which the negotiation is made is not published. Through the OTC markets, traders can conduct transactions whose terms are tailored to their specific needs, but the risk of default by one of the parties is greater.
In other words, spot markets can operate wherever the infrastructure necessary to carry out transactions exists.
Difference of the spot market with other types of financial markets
The spot market differs from the futures market in that the price in the second is affected by the cost of storage and future price movements. In the spot market, prices may be affected by current supply and demand, which tends to make prices more volatile.
Another factor affecting prices in the spot market is whether or not the product is perishable. A non-perishable commodity like gold or silver is sold at a price that accurately reflects future movements in price. By contrast, a perishable commodity such as grains or fruits is directly affected by supply and demand. For example, the price of tomatoes bought in a month of abundance as July will reflect the surplus of this commodity so the price will be lower compared to a month of less abundance as January, during which the demand for Products of this type is increased. Therefore, an investor should not buy tomatoes for delivery in January with July prices,