what is spot price

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. You’ll likely hear about spot prices if you’re trading commodities, which are physical goods like gold and silver, oil, wheat, or lumber. Commodities trade on both the spot market, which is the market for immediate delivery, and the futures market, which is the market for future delivery.

The spot price acts like an anchor for all parties along each precious metal’s supply chain. Miners excavate the ore and sell it to refiners at a price slightly below the spot price. Finally, we at JM Bullion and other precious metals dealers price our products strategically to compete with each other’s offers. However, we try to leave just enough room to make a bit of profit for ourselves when you make your purchase.

However, if the price of gold happens to increase, then the investor will have a problem. For example, an investor has decided to buy a certain amount of gold, but he only has a certain amount of budget to do so. He won’t receive his budget until next month, but the current price of gold is such that if the price stays the same, he will be able to buy the gold he needs with the budget he has.

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. A futures contract is an agreement between a buyer and seller to transact on a certain day in the future. The contract sets the quantity and price of the item(s) to be sold in stone.

  1. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
  2. A spot price is the price you’ll pay to acquire any asset, including securities, commodities, and currencies, immediately.
  3. You’ll likely hear about spot prices if you’re trading commodities, which are physical goods like gold and silver, oil, wheat, or lumber.
  4. Leverage amplifies whichever direction an investment moves, for good or for ill, so a drop in the current prices could have far-reaching effects.
  5. Backwardation tends to favor net long positions since futures prices will rise to meet the spot price as the contract get closer to expiry.

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. If all goes well, the value of your metal(s) will eventually overcome the spread that you paid to us and turn into a win-win scenario for everyone. The price of any good rises and falls due to various internal and external factors. This movement, while normal, generates a degree of risk for both the sellers and buyers of the goods because not every seller or buyer is ready to complete a transaction all the time.

What is the spot price used for?

For example, an oil company might sell a percentage of its future production to lock in a future price to protect against a significant decline. Likewise, oil refiners might buy futures contracts on oil to lock in the price they pay for oil. 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. Spot markets are also referred to as “physical markets” or “cash markets” because trades are swapped for the asset effectively immediately.

what is spot price

The Commodity Futures Trading Commission (CFTC) is responsible for regulating commodity futures. Anyone who trades futures with the public or provides advice about futures contracts must register with the National Futures Association (NFA). In currency transactions, the spot rate is influenced by the demands of individuals and businesses wishing to transact in a foreign currency, as well as by forex traders. The spot rate from a foreign exchange perspective is also called the “benchmark rate,” “straightforward rate” or “outright rate.” Although spot prices can vary by time and geographic regions, the prices are fairly homogenous in financial markets. The uniformity of prices across different financial markets does not allow market participants to exploit arbitrage opportunities from significant price disparities for the same asset in different markets.

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

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. Exchanges bring together dealers 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 available to traders with access to the exchange.

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. Futures trades in contracts that are about to expire 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. Meanwhile, the futures price of Brent oil for delivery in June 2024 was around $81 per barrel. In this example, the spot price for oil was higher than the futures price, implying that the market expected oil prices to decline in the future.

A wheat farmer who’s worried that the spot price will be lower by the time she harvests her crop and brings it to market may sell a futures contract as a hedging strategy. 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. A spot market is where spot commodities or other assets like currencies are traded for immediate delivery for cash. A forward market instead involves the trading of futures contracts (read on to the following question for more on this). The spot price is the current quote for immediate purchase, payment, and delivery of a particular commodity.

what is spot price

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. Futures markets can move from contango to backwardation, or vice versa, and may stay in either state for brief or extended periods of time. Looking at both spot prices and futures prices is beneficial to futures traders. Spot prices are most frequently referenced in relation to the price of commodity futures contracts, such as contracts for oil, wheat, or gold.

The foreign exchange market (or forex market) is the world’s largest OTC market with an average daily turnover of $5 trillion. In mid-August 2023, the spot price for WTI https://www.dowjonesrisk.com/ 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.

Why is the spot price important?

Instead, these spot prices are largely determined by precious metals futures contracts. The spot price is the current price in the marketplace at which a given asset—such as a security, commodity, or currency—can be bought or sold for immediate delivery. While spot prices are specific to both time and place, in a global economy the spot price of most securities or commodities tends to be fairly uniform worldwide when accounting for exchange rates. In contrast to the spot price, a futures price is an agreed upon price for future delivery of the asset. The spot rate is the price quoted for immediate settlement on an interest rate, commodity, a security, or a currency.

Foreign exchange (FX) also has spot currencies markets where the underlying currencies are physically exchanged following the settlement date. Delivery usually occurs within 2 days after execution as it generally takes 2 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. However, the nature of the way these metals are most traded in this day and age makes that definition somewhat incomplete. 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.

The spot rate, also referred to as the “spot price,” is the current market value of an asset available for immediate delivery at the moment of the quote. This value is in turn based on how much buyers are willing to pay and how much sellers are willing to accept, which usually depends on a blend of factors including current market value and expected future market value. A futures price is a set price buyers and sellers agree on in an asset transaction for future delivery.

You buy or sell a stock at the quoted price, and then exchange the stock for cash. Most frequently, spot prices are considered in the context of forwards and futures contracts. One of the reasons for the creation of such financial contracts is to “lock in” the desired spot price of a commodity at some future date because prices constantly change due to fluctuations in supply and demand. 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.

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