What is Spot Market?

Stock exchanges can be described as physical markets where goods such as fruits, vegetables, and cosmetics are sold. Only the difference is that Indian physical goods are usually sold at a fixed maximum retail price. While the pricing system for physical goods can be static, stock markets are dynamic. In the spot market, price discovery for securities is done in real time. What is the spot market, you ask?

There are two main types of markets: spot and futures. The name implies that the securities are delivered in spot markets against payment in futures markets. Future markets require that delivery and payment be made at a later date. Let us dive deeper into spot market definition.

What's the spot market?

Different types of investors are attracted to financial markets. While some investors desire immediate delivery of securities, others are more interested in future delivery. The spot market, also known by the liquid or cash market, is where securities are settled immediately. Although it is ideal that the payment and delivery of securities occur immediately, exchanges can take some time to process transactions. T+2 days is the average settlement time on Indian stock exchanges. This is known as a spot transaction. The buyer and seller must agree to transact in the spot market on an immediate basis. The seller gives up all of his/her securities and the buyer pays the equivalent amount. The price of securities in the futures market or "non-spot" market is determined at the moment, while the transfer of money and securities occurs at a later date. Futures contracts can sometimes be converted to cash trades when the seller and buyer exchange money immediately for the underlying asset. The spot rate is the price at which security is determined in the spot market.

What's the spot rate?

Spot markets allow for immediate settlement of commodities, currencies, and shares. Spot rate is the rate that allows for immediate settlement. It's also known as the spot price of an asset. It is the asset's current market value. The spot rate is determined by the price buyers will pay for security and the amount sellers will accept. The demand and supply scenarios determine the spot rate. However, future prospects and other factors can also have an effect on the spot rate.

Exchanges

Spot markets require a lot of participants. The spot market is open to brokers, traders, investors, financial institutions, and dealers. The exchange provides the infrastructure that allows all participants to interact with one another. The exchange authorizes the dealers or depository participants, processes all buy and sell orders, and gives information to traders about the volume and price of security. There are specific exchanges for each type of trade. Let us look at some spot market examples. The National Stock Exchange allows traders to buy and sell stocks. The National Stock Exchange is a spot stock exchange. However, it also offers a section for futures trading. Multi Commodity Exchange, or MCX, is a futures trading platform. Futures contracts can be traded on the MCX. Certain trades are conducted directly between sellers and buyers. These trades are called over-the-counter trades, and they are not supported by centralised exchanges. OTC prices can be determined based on futures or spot trade prices.

Conclusion

The spot market is an essential component of the global financial systems. It is essential for price discovery and liquidity maintenance. The spot markets are essential for estimating the fair value of assets. Without them, it would be difficult to estimate the asset's true worth. The spot market's immediate settlement mechanism allows money to circulate in the system.