# Spot Market: Definition, How It Works, and Example

> **Definition**
>
> The spot market is the market where assets are traded for immediate payment and delivery, as opposed to futures markets.

## What Is the Spot Market?

The spot market refers to the trade of financial instruments for immediate payment and delivery. Assets traded in the spot market include [commodities](https://www.investopedia.com/terms/c/commodity.asp), currencies, and securities. Delivery occurs when the buyer and seller exchange cash for the financial instrument.

A [futures contract](https://www.investopedia.com/terms/f/futurescontract.asp), on the other hand, is based on the payment and delivery of the underlying asset at a future date. Exchanges and [over-the-counter (OTC)](https://www.investopedia.com/terms/o/otc.asp) markets may provide spot trading and/or futures trading. 

### Key Takeaways

*   Financial instruments trade for immediate delivery in the spot market.
*   Many assets quote a spot price and a futures or forward price.
*   Most spot market transactions settle one business day after the transaction, while foreign exchange trades settle in two business days.
*   Spot market transactions can take place on an exchange, or over the counter.
*   Spot markets are contrasted with derivatives markets, which can trade in forwards, futures, or options contracts.

![Spot Market](https://www.investopedia.com/thmb/9MfKrlXIMlkJFYjyIBJybE6C6lY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/spot-market.asp-Final-8b4aed7f0eb74fbd8f1991293c5b66f8.jpg)

*— Investopedia / Yurle Villegas*

## How Spot Markets Work

Spot markets involve the exchange of physical securities for cash. This is why they are also referred to as physical markets or [cash markets](https://www.investopedia.com/terms/c/cashmarket.asp) because trades are immediate. Both the buyer and seller agree to the immediate transfer of funds, even though transactions settle on different schedules. For instance, a stock transaction settles on a [T+1](https://www.investopedia.com/terms/t/tplus1.asp) basis, or the business day after the transaction date.

[Securities](https://www.investopedia.com/terms/s/security.asp) that are traded on the spot market include the following:

Futures trades in contracts that have an expiration date. They are also sometimes called spot trades since the expiring contract means that the buyer and seller will be exchanging cash for the underlying asset immediately.

The current price of a financial instrument is called 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. Buyers and sellers create the spot price by posting their buy and sell orders. In [liquid](https://www.investopedia.com/terms/l/liquidity.asp) markets, the spot price may change by the second or even within milliseconds, as orders get [filled](https://www.investopedia.com/terms/f/fill.asp) and new ones enter the marketplace.  

> **Important**
>
> A non-spot, or futures transaction, is agreeing to a price now, but delivery and transfer of funds will take place at a later date.

## Spot Market Trading

### On Exchanges

Exchanges bring together [dealers](https://www.investopedia.com/terms/d/dealer.asp) and traders who buy and sell commodities, securities, futures, options, and other financial instruments. Based on all the orders provided by participants, the exchange provides the current price and [volume](https://www.investopedia.com/terms/v/volume.asp) available to traders with access to the exchange.

*   The [New York Stock Exchange (NYSE)](https://www.investopedia.com/terms/n/nyse.asp) is an example of an exchange where traders buy and sell stocks for immediate delivery. This is a spot market.
*   The [Chicago Mercantile Exchange (CME)](https://www.investopedia.com/terms/c/cme.asp) is an example of an exchange where traders primarily buy and sell futures contracts. This is a futures market and not a spot market. However, CME does have some cash markets as well.

### Over the Counter (OTC)

Trades that occur directly between a buyer and seller are called over-the-counter. A centralized exchange does not facilitate these trades. The [foreign exchange market](https://www.investopedia.com/terms/forex/f/foreign-exchange-markets.asp) (or [forex](https://www.investopedia.com/articles/forex/11/why-trade-forex.asp) market) is the world's largest OTC market with an average daily turnover of $1.2 trillion in North America as of April 2024.

In an OTC transaction, the price can be either based on a spot or a future price/date. In an OTC transaction, the terms are not necessarily standardized, and therefore, may be subject to the discretion of the buyer and/or seller. As with exchanges, OTC stock transactions are typically spot trades, while futures or [forward](https://www.investopedia.com/terms/f/forwardcontract.asp) transactions are often not at the spot price unless they are nearing expiration.  

> **Fast Fact**
>
> The word spot comes from the phrase on the spot where in these markets you can purchase an asset on the spot.

## Advantages and Disadvantages of Spot Markets

### Advantages

The spot price is the current quote for immediate purchase, payment, and delivery of a particular [commodity](https://www.investopedia.com/terms/c/commodity.asp). This means that it is incredibly important since prices in derivatives markets such as for futures and options will be inevitably based on these values.

Spot markets also tend to be incredibly [liquid](https://www.investopedia.com/terms/l/liquidity.asp) and active for this reason. Commodity producers and consumers will engage in the spot market and then hedge in the derivatives market.

### Disadvantages

A disadvantage of the spot market is taking delivery of the physical commodity. If you buy spot pork bellies, you now own some live hogs. While a meat processing plant may desire this, a [speculator](https://www.investopedia.com/terms/s/speculator.asp) probably does not.

Another downside is that spot markets cannot be used effectively to [hedge](https://www.investopedia.com/terms/h/hedge.asp) against the production or consumption of goods in the future, which is where derivatives markets are better suited.

Pros

*   Real-time prices of actual market prices
    
*   Active and liquid markets
    
*   Can take immediate delivery if desired
    

Cons

*   Must take physical delivery in many cases
    
*   Not suited for hedging
    

## Example of a Spot Market

Let’s say an online furniture store in Germany offers a 30% discount to all international customers who pay within five business days after placing an order. Danielle, who operates an online furniture business in the United States, sees the offer and decides to purchase $10,000 worth of tables from the online store.

Since she needs to buy euros for (almost) immediate delivery and is happy with the current EUR/USD [exchange rate](https://www.investopedia.com/terms/e/exchangerate.asp) of 1.1233, she executes a foreign exchange transaction at the spot price to buy the equivalent of $10,000 in [euros](https://www.investopedia.com/terms/e/euro.asp), which works out to be €8,902.34 ($10,000 ÷ 1.1233). The spot transaction has a settlement date of T+2, so Danielle receives her euros in two days and settles her account to receive the 30% discount.  

## How Will I Use This in Real Life?

Most of your trades in daily life are spot trades. When you buy gasoline, vegetables, or clothing, you trade at the current price, and exchange the cash and products immediately. For most commodities, prices are constantly being adjusted based on the availability and demand for that item.

If you work as a farmer, you might sell your products on the futures market instead. In this case, the buyer and seller set a price now for a trade that will occur in the future. Farmers spend a long time waiting for crops to mature, and would often prefer to lock in a decent price now than hope for a better one at harvest time.

## What Does Spot Market Mean?

Spot markets trade commodities or other assets for immediate (or very near-term) delivery. The word spot refers to the trade and receipt of the asset being made on the spot.

## What Are Examples of Spot Markets?

Many commodities have active spot markets, where physical [spot commodities](https://www.investopedia.com/terms/s/spotcommodity.asp) are bought and sold in real-time for cash. Foreign exchange also trades in the spot currency market where the underlying currencies are physically exchanged following the settlement date. Delivery usually occurs within two days after execution as it generally takes two days to transfer funds between bank accounts. Stock markets can also be thought of as spot markets, with shares of companies changing hands in real time.

## What Is a Spot and Forward Market?

A spot market is where spot commodities or other assets like currencies are traded for immediate delivery for cash. Forward and futures markets instead involve the trading of contracts where the purchase is to be completed at a later date.

## What Is the Difference Between Spot Markets and Futures Markets?

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](https://www.investopedia.com/understanding-futures-contract-expiration-7972595) would physical delivery of the commodity or other asset take place, and often traders will [roll over](https://www.investopedia.com/ask/answers/073015/how-do-futures-contracts-roll-over.asp) or close out their contracts to avoid making or taking delivery altogether. Forwards and futures are generically the same, except that forwards are customizable and trade over the counter, whereas futures are standardized and traded on exchanges.

## The Bottom Line

Financial markets are vast and take on different characteristics. The spot market is a type of financial market where buyers and sellers exchange assets for cash immediately. The price at which these assets are traded is called the spot price—the price for immediate sale. This is one reason why this market is also called a cash or physical market. Assets traded in the spot market include equities, fixed-income products, currencies, and commodities.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange Commission. "[New 'T+1' Settlement Cycle – What Investors Need to Know: Investor Bulletin](https://www.sec.gov/oiea/investor-alerts-and-bulletins/new-t1-settlement-cycle-what-investors-need-know-investor)."
>     
> 2.  New York Fed. "[FX Committee Releases FX Volume Survey Results](https://www.newyorkfed.org/medialibrary/Microsites/fxc/files/2024/Volume-Survey-Results_07222024)." Page 1 of PDF.
>     
> 3.  CME Group Education. "[Futures Contracts Compared to Forwards](https://www.cmegroup.com/education/courses/introduction-to-futures/futures-contracts-compared-to-forwards.html)."