# Understanding Spot Trading: How It Works and How to Profit

![Spot Trade: Buying or selling a financial instrument at its current market price for immediate delivery.](https://www.investopedia.com/thmb/8p8yZSBhDTFqn1TcMWPnUjoSoKU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/spottrade.asp-FINAL-1-40177b4823ab43f2878339de5a5e8dc0.png)

*— Investopedia / Joules Garcia*

## What Is a Spot Trade?

A spot trade is a financial transaction where assets like currencies, commodities, or securities are traded for immediate delivery, usually settled within two business days. Unlike futures contracts, which lock in a price for a future date, spot trades occur at current market prices, known as the spot rate. The spot exchange rate plays a crucial role in determining the value of these trades, with market liquidity heavily influencing price fluctuations. Examples include foreign exchange contracts and commodity trades like oil or gold. The spot foreign exchange market is one of the largest and most liquid markets in the world, and illustrates the vast scale and real-time nature of spot trading.

### Key Takeaways

*   Spot trading allows for the immediate exchange of financial instruments, such as currencies and commodities, with transactions typically settling within one or two business days.  
    
*   The spot price is the current market price at which a financial instrument can be bought or sold for immediate delivery, and it continually fluctuates based on supply and demand.  
    
*   Most spot trades occur in highly liquid markets, like foreign exchange, where large daily volumes enable instant pricing adjustments.  
    
*   Unlike futures contracts, spot trading involves direct ownership and physical delivery of the asset, making it distinct from trades with deferred settlement dates.

## How Spot Trades Work

A spot trade involves a direct exchange of a [commodity](https://www.investopedia.com/terms/c/commodity.asp), foreign currency, or financial instrument for immediate delivery. This type of trade is also commonly referred to as a spot transaction. Spot transactions can occur on an exchange or [over the counter (OTC)](https://www.investopedia.com/terms/o/otc.asp). Commodities usually trade on exchanges, while currencies often trade OTC.

Forex spot contracts are the most common kind of spot trades. They are usually specified for delivery in two business days, while most other financial instruments settle the next business day. The spot [foreign exchange market](https://www.investopedia.com/terms/forex/f/foreign-exchange-markets.asp) trades electronically around the world. It is the world's largest market, with over $7.55 trillion traded daily. As such, its size dwarfs both the interest rate and commodity markets.

The current price of a financial instrument is known as the [spot price](https://www.investopedia.com/terms/s/spotprice.asp). It is the price at which an instrument can be sold or bought immediately. The spot price is set by buy and sell orders from buyers and sellers. In [liquid](https://www.investopedia.com/terms/l/liquidity.asp) markets, the spot price can change every second as orders fill and new ones arrive.

> **Important**
>
> The price difference between a future or forward contract and a spot contract includes the time value based on interest rates and maturity time.

## Important Factors in Spot Trading

For instruments that settle later than spot, the price combines the spot price and interest cost until [settlement](https://www.investopedia.com/terms/s/settlementdate.asp). In forex, the interest rate [difference](https://www.investopedia.com/terms/d/differential.asp) between two currencies is used for this calculation.

Most interest rate products, such as bonds and [options](https://www.investopedia.com/terms/o/option.asp), trade for spot settlement on the next business day. Contracts are most commonly between two financial institutions, but they can also be between a company and a financial institution. An [interest rate](https://www.investopedia.com/terms/i/interestrate.asp) swap, in which the near leg is for the spot date, usually settles in one business day.

Commodities typically trade on an exchange. The [CME Group](https://www.investopedia.com/terms/c/cme.asp) and the Intercontinental Exchange, which owns the [NYSE](https://www.investopedia.com/terms/n/nyse.asp), are popular exchanges. Most commodity trades are settled in the future without delivery; contracts are sold back before [maturity](https://www.investopedia.com/terms/m/maturity.asp), and gains or losses settle in cash.

## What Is the Spot Market?

The term [spot market](https://www.investopedia.com/terms/s/spotmarket.asp#toc-spot-market-faqs) refers to a market that trades certain financial instruments for near-term or immediate delivery. These instruments include commodities, currencies, and other securities. Buyers and sellers normally exchange cash for the noted security in the spot market, which is why they're normally called cash or physical markets.  

## What Is a Spot Price?

A spot price is the current market price quoted for immediate delivery for a financial instrument, such as a currency, commodity, or interest rate. This is the price that traders pay when they want to take delivery for an asset right away. A spot price is used to determine future prices.

## What's the Difference Between a Spot Rate and a Forward Rate?

Spot and forward rates are two prices used in the foreign exchange market. The term spot rate refers to the current market price quote for immediate delivery. Spot rates are used for currencies, commodities, interest rates, and other securities. A forward, rate, on the other hand, is a future price that two parties agree upon for a currency or other security.

## The Bottom Line

Spot trading involves the immediate exchange of financial instruments, such as foreign currencies and commodities, for instant delivery at current market prices. Unlike forward or futures contracts, which settle at a later date, spot trades occur almost instantly and reflect real-time market conditions. These transactions can take place on organized exchanges or OTC, offering flexibility for different traders. Given the vast size and liquidity of the global foreign exchange market, spot prices often serve as key benchmarks for future pricing and economic indicators.

> **Article Sources**
>
> 1.  Bank of International Settlements. "[OTC Foreign Exchange Turnover in April 2022](https://www.bis.org/statistics/rpfx22_fx.htm)."
>     
> 2.  FIA. "[Global Futures and Options Volume Hits Record 137 Billion Contracts in 2023](https://www.fia.org/fia/articles/global-futures-and-options-volume-hits-record-137-billion-contracts-2023)."
>     
> 3.  CME Group. "[Daily Exchange Volume and Open Interest](https://www.cmegroup.com/market-data/browse-data/exchange-volume.html)."
>     
> 4.  U.S. Securities and Exchange Commission. "[Final Rule: Shortening the Securities Transaction Settlement Cycle](https://www.sec.gov/files/rules/final/2023/34-96930.pdf)."
>     
> 5.  CME Group. "[The World's Leading and Most Diverse Derivatives Marketplace](https://www.cmegroup.com/?gclsrc=aw.ds&gclid=CjwKCAjw0a-SBhBkEiwApljU0rDmUH_AnQQDyK65g8zR7zNMhN5mCuXaXENAIUjKI3SSHZr1b3SgdRoCeO4QAvD_BwE&gclsrc=aw.ds)."
>     
> 6.  Intercontinental Exchange. "[Connect to Global Markets](https://www.ice.com/about/exchanges-clearing)."