Spot Price Definition, Example, Spot Prices vs Futures Prices

It is dependent on the market forces of demand and supply as well the fundamentals of the company. The spot price or spot rate is the current value of an underlying asset, for which it can be bought or sold with the expectation of immediate delivery. As we mentioned, most of these trades on COMEX do not involve the actual delivery of the physical metal. In fact, it is estimated that more than 90% of COMEX futures contracts are settled without any involvement of their underlying physical metals at all. In either situation, the futures price is expected to eventually converge with the current market price.

Investors should investigate the causes of abrupt spikes or dips in spot prices, as well as the insights provided by stock signals; such scrutiny could potentially pave way for insightful trading decisions. The term “supply” denotes the market’s available quantity of a commodity or security; this encompasses production levels for commodities such as crude oil, precious metals, and crops. A surge in supply–potentially resulting from heightened production or novel discoveries–usually depresses spot prices provided that demand remains stable.

1. Spot prices are most frequently referenced in relation to the price of commodity futures contracts, such as contracts for oil, wheat, or gold.
2. A spot price is the price you’ll pay to acquire any asset, including securities, commodities, and currencies, immediately.
3. Understanding these demand influences is vital, especially when considering the long-term outlook that informs estimations of terminal value.
4. This remains true for all instruments irrespective of the nature of asset viz; shares, currencies or commodities.
5. However, the value you can realize comes from the potential appreciation of the asset over time.
6. It’s the value sellers can immediately get for an asset and the price a buyer would pay for prompt delivery.

Arbitrage by nature is risk-free, and therefore trading opportunities if any would last for a very short time. At the expiry of the contract, the futures price will always converge on the spot price, irrespective of premium or discount on the underlying security. Spot prices are most frequently referenced in relation to the price of commodity futures contracts, such as contracts for oil, wheat, or gold. You buy or sell a stock at the quoted price, and then exchange the stock for cash. Although it is possible that a buyer and seller might independently agree to a futures contract on a product, most futures contracts are traded on a public exchange.

The buyer puts up bids along with the quantity of shares to be bought, this is known as “bid quantity”, and sellers line up to sell the shares, this is referred to as “ask quantity”. Unpredictable factors like weather, political instability, and labor strikes are among the many factors that can affect commodity prices. For individual investors who want to diversify with commodities, investing in an index fund that tracks a major commodity index may be a less risky option than investing directly. In other words, you are buying gold, silver, platinum, or palladium at slightly above the spot price when you buy it, regardless of whether it’s from us or anyone else. However, the value you can realize comes from the potential appreciation of the asset over time.

Example of a spot price

Regardless of what happens in the markets between the date the transaction is initiated and the date it settles, the transaction will be completed at the agreed-upon spot rate. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with trade99 review this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money. A spot price is the price you’ll pay to acquire any asset, including securities, commodities, and currencies, immediately. Our up-to-the-minute spot prices are provided by a variety of reliable sources.

The phenomena of ‘contango’ and ‘backwardation’ in commodity markets constitute a critical element within this relationship. When futures prices surpass current spot prices – an indicator that hints at a future rise in value due to potential supply limitations or heightened demand, we observe contango. On the other hand, when futures prices plummet below spot values—suggesting an upcoming depreciation likely caused by predicted increases in supply or diminishing demand—we witness what is known as backwardation. The main difference between spot prices and futures prices is that spot prices are for immediate buying and selling, while futures contracts delay payment and delivery to predetermined future dates. The spot rate is the price quoted for immediate settlement on an interest rate, commodity, a security, or a currency.

Spot Market and Exchanges

Precious metals futures are traded around the clock on weekdays on COMEX, the New York-based exchange for precious metals. The key task of tracking spot price trends in securities identifies broader market fxchoice review movements, such as bull or bear markets. If a stock’s spot price continuously ascends; it signals not only investor optimism but also a strong economic backdrop–typifying bullish market conditions.

Advantages and Disadvantages of Spot Markets

This type of transaction is most commonly executed through futures and traditional contracts that reference the spot rate at the time of signing. Traders, on the other hand, generally don’t want to take physical delivery, so they will use options and other instruments to take positions on the spot rate for a particular commodity or currency pair. However, its futures contract with a settlement date of one year later was priced at $64 per barrel, indicating that the market expected oil prices to drop. The spot price of crude oil that day would be $68, and the contract price would be $64, which would be based in part on the spot price. The other issue is the fact that there are many subjective elements that can combine to affect the value of precious metals, in one way or the other. After all, many of those in the futures markets are speculators, and their entire lives are predicated on reading the tea leaves, so to speak.

For those with a passing interest in precious metals, the finer details of the spot price might not be important. A blend of dynamic factors gives rise to spot prices, which reflect the immediate values of commodities and securities. These instant values take shape primarily under the influence of supply, demand, and market sentiment. Forwards and futures are derivatives contracts that plus500 forex review use the spot market as the underlying asset. These are contracts that give the owner control of the underlying at some point in the future, for a price agreed upon today. Only when the contracts expire would physical delivery of the commodity or other asset take place, and often traders will roll over or close out their contracts in order to avoid making or taking delivery altogether.

Many commodities, including palladium, platinum, and silver also trade in this manner. It turns out that the spot price has more flavors and complexity than that, and it is inaccurate to relegate it as the objective price of these metals. The moneyness of options is determined by comparing the spot price with the strike price of the option. As RIL futures are trading lower than the RIL spot, this is called “backwardation”.

The foreign exchange market (or forex market) is the world’s largest OTC market with an average daily turnover of $7.5 trillion as of April 2022. In mid-August 2023, the spot price for WTI oil was around $82 per barrel, while the spot price for Brent was about $86.50. For comparison, the futures price of WTI for delivery in May 2024 was $77.50 per barrel. It is observed that there is a variance in the spot price and future price of the corresponding underlying security.