Trading Basics
Cash or Spot Market
Also known as a spot market, cash markets are different to futures contracts, as commodities are traded immediately for cash at the current market price.
What is a Cash or Spot Market?
Whenever you buy or sell a stock on the stock exchange, you’re effectively taking part in the spot or cash market.
Since spot markets play an extremely important role in global financial markets and capital flows, we’ll cover all you need to know about them in this article.
What is the Spot Market?
The spot market, also known as the cash or physical market, is a financial market in which financial instruments are traded for immediate delivery.
Unlike the futures markets, where market participants agree on the futures prices today, but the physical delivery takes place at a future date, the settlement in the spot market takes place in T+2 working days.
In other words, the delivery needs to take place within two working days after the spot date.
The futures market also uses standardised contracts for trading (for example, a standard COMEX Gold Futures contract includes 100 troy ounces of gold).
What is Traded on the Spot Market?
All major asset classes can be traded on the spot market. Gold is traded on the gold spot market, silver on the silver spot market, copper on the spot copper market and currencies on the spot currency market.
However, spot markets of different asset classes differ in the way how they’re traded.
How to Trade on a Spot Market?
A spot market can be organised through a regulated exchange or over-the-counter.
Exchange
The best-known spot market organised through an exchange is the stock market. Market participants buy or sell stocks using the spot market prices today, ultimately creating and changing the market price through supply and demand. This is how stock prices change on a daily basis. After a trade is completed, the settlement date will be set at T+2 from the trade date.
Commodities can also be traded on a regulated spot exchange. Traders who take part in these exchanges impact the spot gold price, spot copper prices and spot silver prices the same way how spot stock traders impact the spot prices of stocks. Simply follow the gold price chart, and you’ll see how the supply and demand forces affect the price of gold.
The New York Stock Exchange is an example of a spot stock exchange, while the Chicago Mercantile Exchange is an example of a futures (non-spot) exchange.
Over-the-Counter
Financial instruments can also be traded through unregulated over-the-counter, or OTC markets. In an OTC market, trades occur directly between a buyer and a seller without intermediaries. Since no exchange facilitates the trade, OTC trades can be agreed in a non-standard format, and the price doesn’t need to be publicly published. The foreign exchange market is probably the best-known OTC spot market example, in which trillions-worth of currencies exchange hand every day. Currencies futures, on the other hand, are traded on the futures market.
Conclusion
The spot, cash or physical market is a financial market in which commodities, currencies and other financial instruments are traded for instant delivery.
Unlike the futures market, in which prices are agreed upon today with the delivery taking place at a future date, the settlement of a spot trade must take place two days after the trade date.
Perhaps the most popular spot market example is the New York Stock Exchange. Billions worth of stocks are traded on a daily basis, and settlement takes place two dates after the trade date.
While the NYSE is an example of an organised spot exchange, spot transactions can also occur over-the-counter, with the Forex market being the best known over-the-counter spot market.
Other Trading Basics
Circuit Breaker
When exchanges stop the trading in a security that has fallen significantly.
This is done to stop an uncontrollable panic.
Backwardation
Backwardation occurs when a bid price exceeds the ask price.
This usually occurs when stock is suspended or under a share repurchase scheme.
It can also mean that a futures contract will trade at a higher price when it is coming close to expiring.
The opposite of backwardation is known as contango.
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