Spot Market
The trading of commodities and financial instruments for immediate delivery takes place on a spot market. Delivery describes the actual exchange of a financial instrument or commodity for cash. Because cash payments are instantly processed and there is a tangible exchange of assets, the spot market is also known as the cash market or the physical market.
Spot trading types
Spot markets can be divided into two categories: over-the-counter (OTC) and organized market exchange.
1. OTC (over-the-counter)
When buyers and sellers agree to a bilateral transaction, over-the-counter (OTC) trading occurs. There is no third party or central exchange institution to oversee the trade or transaction. Unlike what is typical on organized exchanges, the assets being traded might not be standardized in terms of quantity, price, or other factors.
As a result, all trade terms are negotiated and transactions are completed in person. OTC market prices may not be disclosed because most dealings are conducted in private. The foreign exchange market is the most well-liked and active OTC market.
2. Market Transactions
Buyers and sellers come together to bid and offer the available commodities and financial instruments in a formal market exchange. Trading might take place on a trading floor or an electronic trading platform. Trading has been more efficient as a result of electronic trading platforms, where prices are set quickly, given the enormous volume of trades on numerous exchanges.
Exchanges trade a wide range of commodities and financial instruments, or they may concentrate on a specific asset type. Exchange brokers who operate as market makers typically conduct trading. The exchange standard states that the assets traded on exchanges are standardized.
For assets being traded or in particular amounts and values, there may be minimum contract prices. Many bids from buyers (prices offered to buy) and offers from sellers (prices offered to sell) are used to determine prices. Spot prices may change every minute or even every millisecond.
Exchanges are regulated, and trading procedures are standardized. Two well-known exchanges are the New York Stock Exchange (NYSE), which mostly trades stocks, and the Chicago Mercantile Exchange Group, which primarily trades commodities and also offers to trade in options and futures.
The advantages of spot markets
Spot markets allow for trading in a public setting at real-time prices that are known to all participants and open to the general public. In general, spot market transactions are easier to complete.
On spot markets, traders have the option to hold and wait for a better deal if they are not satisfied with the prices and terms currently offered.
Trades are initiated and completed instantly.
There may not be any minimum capital requirements for transactions on the spot market, in contrast to some contracts on the futures market that impose minimum investment amounts for a single contract.
FAQS:
What is spot trading?
Spot trading is the practice of purchasing and selling assets at the present going rate, or spot price, to acquire instant possession of the underlying asset. Because short-term bets can be opened on the spot market with low spreads and no expiration date, day traders favor it.
