The spot market

The spot market is a securities or commodities market where goods, both perishable and non-perishable, are sold for cash and delivered immediately or within a short period of time. Contracts sold on a spot market are also effective immediately. The spot market is also known as the “cash market” or “physical market.” Purchases are settled in cash at the current prices set by the market, as opposed to the price at the time of delivery. An example of a spot market commodity that is regularly sold is crude oil; it is sold at the current prices, and physically delivered later.
A commodity is a basic good which is interchangeable with other like-kind commodities. Some examples of commodities are grains, beef, oil, gold, silver, electricity, and natural gas. Technology has entered the market with commodities such as cell phone minutes and bandwidth. Commodities are standardized, and must meet specific standards to be sold on the spot market.
The world spot market, or foreign currency trading (Forex), is a huge spot market. It is the simultaneous exchange of one nation’s currency for another’s. The way it works is through an investor selecting a currency pair.
Great Britain (GBP) and the United State’s (USD) currency is a common pair that is bought and sold on the world spot market. If the GBP is gaining strength against the USD, the investor buys. If it is weak, he sells. The benefit of foreign currency is that it is very liquid; an investor can enter and exit the market as he chooses.
The spot market differs from the futures market in that the price in the futures market is affected by the cost of storage and future price movements. In the spot market, prices can be affected by current supply and demand, which tends to make the prices more volatile.
Another factor that affects spot market prices is whether the commodity is perishable or non-perishable. A non-perishable commodity such as gold or silver will sell at a price which reflects future price movements. A perishable commodity such as grain or fruit will be affected by supply and demand. For example, tomatoes bought in July will reflect the current surplus of the commodity and will be less expensive than in January, when demand for a smaller crop drives costs up. An investor cannot purchase tomatoes for a January delivery at July’s prices, making tomatoes a perfect example of a spot market commodity