For comparison, the futures price of WTI for delivery in May 2024 was $77.50 per barrel. A spot commodity is in contrast to commodity futures, a contract in which the buyer receives delivery of the commodity at a forward point in time. CFDs are traded using leverage, which means you’ll put down a deposit (percentage of the value of the trade) to get started. While margin lowers the cost of entry for your trade, it magnifies any profits and losses, which means you could lose more than your initial deposit. Spot and futures markets are two different ways to trade popular markets. You probably won’t hear the term “spot price” very often when you invest in stocks because stocks always trade at spot price.

A commodity’s spot price is the current cost of that particular commodity, for current purchase, payment, and delivery. In commodity spot contracts, payment is required immediately, as is delivery. The trend formed by the spot price reflects market participant behavior. It varies every time the trade is transacted and is dependent on the number of buyers and sellers at a particular price point. The buyer puts up bids along with the quantity of shares to be bought, this is known as “bid quantity”, and sellers line up to sell the shares, this is referred to as “ask quantity”. Hedging means holding two or more positions at the same time with the aim of offsetting any losses from the first position with gains from the other.

Commodity Spot Price vs. Futures Price: an Overview

Buyers and sellers make the spot price by putting the buy and sell orders. In contrast, in the liquid markets, the spot price changes by the second, as outstanding orders are filled and new ones enter the marketplace. The current price at which Gold or Silver is being traded by the major dealers who contribute to axes broker the price feed is known as the spot price. The price that is now being “Bid” by buyers is the averaged-out bid price. Trades that occur directly between a buyer and seller are called over-the-counter. The foreign exchange market (or forex market) is the world’s largest OTC market with an average daily turnover of $7.5 trillion as of April 2022.

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 on its direction. The second difference between the futures market vs the spot market is the timing of the trade, and expiry. The spot price relates to the current market value of a particular asset, and will go up or down in real time based review dual momentum investing on market demand. At any point in time, forces of demand and supply play an essential role in determining the market price. It is very different from futures or forwards contracts because those are agreed-upon prices based on some deal.

Should You Sell Gold or Silver For Melt Value?

For example, an airline might use oil futures contracts to secure a fixed price for fuel, thus ensuring stable operating costs despite fluctuating oil prices. Similarly, agricultural producers might use crop futures to guarantee a certain price for their produce to mitigate the risk of price drops at harvest time. Hedging strategies help businesses stabilize their costs, leading to more predictable financial outcomes. The phenomena of ‘contango’ and ‘backwardation’ in commodity markets constitute a critical element within this relationship. When futures prices surpass current spot prices – an indicator that hints at a future rise in value due to potential supply limitations or heightened demand, we observe contango. The prices of commodities futures are not always higher than spot prices.

The former gives an optimistic picture of the security, while the latter denotes that the security price is going south. Besides knowing the spot price, one must analyze the price chart of a financial instrument before making any trading decision. 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.

• Essentially, the spot price is a particular type of market price that deals explicitly with transactions that require immediate settlement.
• She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.
• Forward and futures markets instead involve the trading of contracts where the purchase is to be completed at a later date.

What Is Spot Trading and How Do You Profit? How It Works

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Equally influential is demand, which signifies the market’s desire to purchase commodities or securities. Economic growth, technological innovation, and market trends can fuel rising demand that in turn elevates spot prices. However, on the flip side of this scenario – declining demand, often prompted by economic downturns or evolving consumer preferences – generally exerts downward pressure on spot prices.

Spot market vs futures market summed up

A spot price in the share market refers to the current market price (CMP) of a security. It is dependent on the market forces of demand and supply as well the fundamentals of the company. 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 markets, the spot price may change by the second, as outstanding orders get filled and new ones enter the marketplace. As noted above, a spot trade is a financial transaction that involves a commodity, foreign currency, or financial instrument.

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. Through derivatives, buyers and sellers can partially mitigate the risk posed by constantly fluctuating spot prices. The spot price is the current market price at which a particular asset, such as a commodity, security, or currency, can be bought or sold for immediate delivery.

Contango favors short positions, as the futures lose value as the contract approaches expiry and converges with the lower spot price. 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.