What Is a Spot Price?

Stock markets can also be thought of as spot markets, with shares of companies changing hands in real-time. In mid-August 2023, the spot price for WTI oil was around $82 per barrel, while the spot price for Brent was about $86.50. For comparison, the futures price of WTI for delivery in May 2024 was $77.50 per barrel. In other words, you are buying gold, silver, platinum, or palladium at slightly above the spot price when you buy it, regardless of whether it’s from us or anyone else. However, the value you can realize comes from the potential appreciation of the asset over time.

Our up-to-the-minute spot prices are provided by a variety of reliable sources. For more information on precious metal spot prices and charts, please see our Silver Prices, Gold Prices, and Platinum Prices pages. He pledges to buy his brokerage firm financial definition of brokerage firm required amount of gold at the current price with his projected budget. To most people, a spot price is merely the price to buy an ounce of gold, silver, platinum, or palladium prior to its conversion into a bar, round, or coin.

While the spot price of a security, commodity, or currency is important in terms of immediate buy-and-sell transactions, it perhaps has more importance in regard to the large derivatives markets. Options, futures contracts, and other derivatives allow buyers and sellers of securities or commodities to lock in a specific price for a future time when they want to deliver or take possession of the underlying asset. Through derivatives, buyers and sellers can partially mitigate the risk posed by constantly fluctuating spot prices.

  1. In either situation, the futures price is expected to eventually converge with the current market price.
  2. The spot price is the current market price of a security, currency, or commodity available to be bought/sold for immediate settlement.
  3. The spot price is the current quote for immediate purchase, payment, and delivery of a particular commodity.
  4. The spot rate is the price quoted for immediate settlement on an interest rate, commodity, a security, or a currency.
  5. As with exchanges, OTC stock transactions are typically spot trades, while futures or forward transactions are often not spot.

Specifically, it refers to the price of a troy ounce, which is roughly 10% heavier than a standard ounce, but that’s mostly a semantic difference to the layman. You probably won’t hear the term “spot price” very often when you invest in stocks because stocks always trade at spot price. You buy a stock for the quoted price, and the transaction occurs immediately. Spot markets trade commodities or other assets for immediate (or very near-term) delivery.

A disadvantage of the spot market, however, is taking delivery of the physical commodity. While a meat processing plant may desire this, a speculator probably does not. Another downside is that spot markets cannot be used effectively to hedge against the production or consumption of goods in the future, which is where derivatives markets are better-suited. As we mentioned, most of these trades on COMEX do not involve the actual delivery of the physical metal. In fact, it is estimated that more than 90% of COMEX futures contracts are settled without any involvement of their underlying physical metals at all. However, the nature of the way these metals are most traded in this day and age makes that definition somewhat incomplete.

What role does the spot price play for the actual metals?

As an example of how spot contracts work, say it’s the month of August and a wholesaler needs to make delivery of bananas, she will pay the spot price to the seller and have bananas delivered within 2 days. Since the commodity wouldn’t be needed until December, a forward contract is a better fit for the banana investment. In contrast to the spot price, a futures or forward price is an agreed-upon price for future delivery of the asset. The futures price could be higher or lower depending on market conditions. Forwards and futures are derivatives contracts that use the spot market as the underlying asset.

These are contracts that give the owner control of the underlying at some point in the future, for a price agreed upon today. Only when the contracts expire would physical delivery of the commodity or other asset take place, and often traders will roll over or close out their contracts in order to avoid making or taking delivery altogether. Forwards and futures are generically the same, except that forwards are customizable and trade over-the-counter (OTC), whereas futures are standardized and traded on exchanges. The spot market is where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery. A futures contract, on the other hand, is based on the delivery of the underlying asset at a future date.

The Relationship Between Spot Prices and Futures Prices

Contango favors short positions, as the futures lose value as the contract approaches expiry and converges with the lower spot price. The spot price provides potential buyers and sellers with a clear current market price for an asset. While the spot price can refer to the current market price of any asset, it’s most common in the commodities market. Buyers of oil, gold, silver, and other commodities can buy them immediately on the spot market at their current spot prices. The problem with precious metals’ spot prices is that the primary actors on the spot price are almost always buyers who are not taking actual delivery of the gold, silver, platinum, or palladium they are buying. Instead, these spot prices are largely determined by precious metals futures contracts.

What Are Examples of Spot Markets?

Futures contracts with longer times to maturity normally entail greater storage costs than contracts with nearby expiration dates. In the example above, an actual physical commodity is being taken for delivery. This type of transaction is most commonly executed through futures and traditional contracts that reference the spot rate at the time of signing. Traders, on the other hand, generally don’t want to take physical delivery, so they will use options and other instruments to take positions on the spot rate for a particular commodity or currency pair.

What’s the relationship between the spot price and a futures price?

Traders can extrapolate an unknown spot rate if they know the futures price, risk-free rate, and time to maturity. Spot markets are also referred to as “physical markets” or “cash markets” because trades are swapped for the asset effectively immediately. Although it is possible that a buyer and seller might independently agree to a futures contract on a product, most futures contracts are traded on a public exchange. Precious metals futures are traded around the clock on weekdays on COMEX, the New York-based exchange for precious metals. The spot price is the current quote for immediate purchase, payment, and delivery of a particular commodity.

Likewise, oil refiners might buy futures contracts on oil to lock in the price they pay for oil. Spot prices are constantly moving, so asset buyers and sellers, especially of commodities, often want to lock into the future price of an asset to protect against a sudden and sharp price movement. These commodities traders will buy or sell futures contracts on the desired asset to lock in its price or speculate https://www.forex-world.net/stocks/discover-financial/ on its direction. Commodity traders also use the spot price as the base for futures prices. They will use futures contracts to lock in a future price for an asset or to speculate that the price of an asset will fluctuate significantly before the delivery date. The spot price is the current market price of a security, currency, or commodity available to be bought/sold for immediate settlement.

The spot rate from a foreign exchange perspective is also called the “benchmark rate,” “straightforward rate” or “outright rate.” Exchanges bring together dealers and traders who buy and sell commodities, securities, https://www.topforexnews.org/brokers/xtb-vs-admiral-markets-who-is-better-in-2021/ futures, options, and other financial instruments. Based on all the orders provided by participants, the exchange provides the current price and volume available to traders with access to the exchange.

Prices are usually determined by the simple supply and demand of physical objects. The price is the equilibrium point between how much the seller is willing to accept for its trade and what the buyer is willing to spend in return. Some of the first things you see when you visit the JM Bullion site are the spot prices for gold, silver, platinum, and palladium. That seems simple enough – the spot price is merely the price of these metals.

A company that needs to secure the farmer’s wheat may buy the forward contract as a hedge in case the spot price of wheat increases. A third-party speculator aiming for profits could also buy or sell the forward contract based on whether they predict the spot price of wheat will rise or fall. However, its futures contract with a settlement date of one year later was priced at $64 per barrel, indicating that the market expected oil prices to drop. The spot price of crude oil that day would be $68, and the contract price would be $64, which would be based in part on the spot price.

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