Spot Market or Cash market is a type of financial market that allows the delivery of financial instruments, such as currencies, securities, and commodities immediately. It is described as OTC (over-the-counter) as transactions take place quickly with cash as the medium of exchange.
Understanding Spot Market
In Spot Market, the buyer and the seller agree to go through with the trade “right now”. It is executed immediately and effectively. Although, the official transfer of cash between the two parties may take some time, as in most market and currency transactions.
Spot Market is defined as a trade or futures transaction that deals based on the real-time price, although transfer of funds and delivery may happen in a few days.
The Spot Price is the current price of an asset or financial instrument. It is the price by which the two parties agree to trade immediately.
The spot price is determined by either a buyer or a seller by posting their buy or sell orders. In markets with high volatility, the spot price may change quickly as orders get filled every second and new orders come in from time to time.
Spot Market and Exchanges
Transactions or Exchanges bring traders who buy and sell assets or financial instruments together. The exchange between a buyer and a seller is based on the current price and volume available to both.
An example of a spot market is the NYSE or the New York Stock Exchange, where an exchange or a buy and sell of stocks happen by the second.
Spot Market and Over-the-Counter
A trade directly between the buyer and the seller is called an OTC or over-the-counter transaction. Centralized markets do not offer this kind of trade. Decentralized markets, such as the Forex (foreign exchange) market, offer this. In fact, the Forex market is the biggest OTC market with a daily turnover of more than $5 trillion.
In an OTC transaction, the exchange can be based on the current or future price. Terms are not necessarily standardized, therefore, it can be subject to the agreement between the buyer and the seller. OTC stocks exchanges are usually spot trades, while futures or forward contracts are not.