What is Spot Price?

It is important to be familiar with the terms used in stock trading before you start trading. The term 'Spot Price' is a common term used to trade. This article will answer the following questions: What is the spot market price? Let's first understand what the spot price means.

What's the spot price ?

The spot price is the price you see next to the stocks when you log in to your trading portal.

Technically speaking, the spot price is the current market price for a stock or other asset. Let's say you want to purchase the stock of a company. You would need to pay the spot stock price that is flashing at the time you place the order. This example might help you understand what spot price means.

Let's say you are looking to purchase the stock of HDFC Bank Limited. The stock's current market price is Rs. 1,200. This is the spot price. You would need to pay Rs. 1,200 to buy one share in HDFC Bank Limited. 1,200 The spot price of a stock changes every second so by the time you place an order to buy one share of the company's stock, it would have changed. You might need to place a "market order" to purchase the stock at the spot market price at the time you place the order.

What is the relationship between spot and futures prices?

We now have a better understanding of the meaning of spot price. Let's dive deeper and see how futures price and spot price relate. You may be wondering what the futures price is. Let's learn the basics.

The futures price for an asset is the price you will have to pay now in order to secure a transaction that will occur at a later date. Let's say you want to purchase a share in HDFC Bank Limited within a month. To purchase a share in HDFC Bank Limited, you will need to pay Rs. 1,205 This is the futures price.

Now that you know what spot and futures prices mean, let's look at the relationship between them.

The spot price of an asset is the basis for determining the asset's futures price. Without the spot price, it is impossible to determine the futures price for any asset. The futures price for an asset can be higher, lower, or equal to the spot price for the asset.

Convergence is when the spot and futures prices are equal. This happens usually on the expiry date of a futures agreement.

Backwardation is when the futures price is lower that the spot price. This is rare and does not happen often.

Contango is when the spot price and the futures price are higher than each other. This is quite common and is what most people call contango.

Regardless of whether the futures prices are in contango or backwardation, when the expiry date of the futures contract nears, both prices will automatically converge.

Conclusion

For immediate delivery of shares, you will need to pay the full amount upfront with the spot price. The futures price only requires you to pay a fraction of the amount upfront. This is known as the margin. The remaining amount would be due upon expiration of the contract. After you have paid the entire amount, you can take delivery of the shares you purchased. This is the most important difference between the spot and futures prices.