Spot market explained is important for traders. It is one of the financial markets in the world where commodities and instruments are traded for instant delivery.
Delivery means that the financial commodity or instruments are physically exchanged for cash consideration. This market is also known as the physical market or the cash market. It is because the cash payments are executed immediately. Generally, there are physical exchanges of the assets.
What is A Spot Market?
Cash payment and delivery in the spot market are usually made on the spot. However, the settlement process which includes cash transfer and physical delivery in most organized markets typically takes 2 business days.
Even though the settlement date is T+2, the execution of the contract between seller and buyer is performed on the spot at the existing quantity and prevailing price. This is in contrast with the futures and forward markets.
In those two markets, the parties agree in trading the underlying asset at a future/forward price, as well as the delivery. Therefore, these two markets contract today but the settlement is going to be done in the future.
The spot market can exist and execute such a trade wherever there are proper infrastructures. Spot Market Explained, for example, is when there is an investor who desires to buy 1,000 shares of IBM on the NYSE (New York Stock Exchange). He contacts his broker for this purpose.
The broker will buy the at say $117.60 which is the prevailing market price for the share. The fund transfer to the seller is done by the broker at $117,600. Once the funds are received by the seller, the share’s ownership will be transferred to the investor. The settlement process is done immediately and on the spot.
Spot Market Explained, the Traded Assets
The tradable assets on the spot market are like fixed income instruments like treasury bills, bonds, and foreign exchange. Trading energy, livestock, agriculture, and metals, which are commodities, also dominate the market.
Non-perishable and perishable commodities are also traded on the market. The largest spot market is the foreign exchange market. It is a place where various currencies across the world are exchanged by traders with the best forex broker. The daily turnover of the market is over $6 trillion.
To be efficiently traded on spot markets, commodities are standardized. The most traded commodity is crude oil. Recently, mobile minutes and bandwidth has been featured in commodities in the market.
Characteristic and Trading Mechanism
The spot market is associated with certain features. The most obvious are the transaction, delivery, and transfer.
1. Transactions (known as the spot rate or the spot price) are settled at the prevailing price.
2. Asset delivery is carried out immediately (otherwise at T+2).
3. Instant funds transfer (otherwise, the solution can be at T+2).
The prevailing price for an executed trade is the price on the spot market. It is also known as the spot rate or the spot price. When it comes to spot market explained, Sellers and buyers are the determiner for the prices. It is determined through the economic process (demand and supply).
The spot price is the result of demand and supply. It is different from the forward price which is determined by storage cost, yield curve, and value of money.
Sellers and buyers need to agree to receive and pay the spot price in the broker like Didimax forex broker for the standard amount of the asset offered. It is the condition for the transaction to take place.
Trading forex in the financial market should be done with a professional broker like Didimax for a successful journey. Understanding spot market explained and
the trading skills, start trading with us.