What is the spot market?

Definition and meaning

The spot market, also known as the cash market or physical

market, is a public financial market in which commodities or
financial instruments are bought and sold for immediate
delivery (or within a couple of days, depending on local
regulations).

The price quoted for a purchase or sale on the spot market is

called the spot price.

The spot market contrasts with the futures market, where

delivery occurs at a later date.

Some commodities are sold at spot prices and delivered at a

future date (of up to one month). Crude oil is an example.

In the spot market you pay now and get it now (or
very, very soon).
Purchases are paid for in cash at current prices set by the
market, rather than the price at the time of delivery.

The Nasdaq Business Glossary says the following about

cash markets:

“Also called spot markets, these are markets that involve

the immediate delivery of a security or instrument.”

Types of Spot Market

The spot market which is also called the cash market is a
financial market, in which the financial commodities and
instruments are transacted for instantaneous delivery. It
contrasts with a futures market in which distribution or
delivery is owed at a later date. A spot market can be:
1. Exchange- It is also called an organised market where the
security or commodity is traded on an exchange using and
changing the current market price.
2. Over the counter (OTC) - In OTC, the trades are based on
contracts which are done openly between two parties, and
not subject to the guidelines of an exchange. The contract
terms are approved between the parties and might be non-
standard.

SPOT MARKET TRADING:

The spot market, also known as the physical or cash market,

is where assets are exchanged for cash and delivered
forthwith. Here, the market deals in the current price of a
financial instrument. In this market, compensation happens
in X + 2 working days. That is, delivery of the commodity and
cash must be accomplished after two working days from the
trade date.
Benefits of trading the spot market :
There are many benefits to trading the spot market which
include:
 Lower capital requirement
 Easy to operate
 Lower transaction costs
 An ever-changing market
 Access to large trading volumes
Spot market trading provides a wealth of profitable trading
opportunities so why not give it a try
SPOT MARKET TERMINOLOGY

Moving forward, there are a couple of terms you need to arm

yourself with to better understand how spot market trading
works:

 Value date: This is the date when a value fluctuating

asset’s price is agreed upon. The value date is called into
action when possibilities for disagreements exist due to
variations in the timing of valuation.

 Spot date: This is the normal settlement day when

transactions are carried out practically; “on the spot”.

 Spot Price: This is the prevailing price at which a security

is bought and sold at a particular time and place.
 Spot Contract: This is a spot transaction of trading a
commodity, security or currency for a settlement.
  Cross rates: In the FX market, currencies are quoted
against the US dollar (USD). As you would anticipate, not
every cross border transaction is conducted wholly in
the USD. Merchant invoices are invoiced in an array of
currencies. This calls for determining an exchange rate
between, say, the Japanese yen and other currencies.
Hence, the need to compute a ‘cross rate’ where various
currencies are quoted against one another and not just
the USD.

HOW THE SPOT MARKET TRADING WORKS:

In this market, delivery takes place right away or on the spot.
For instance, say you wish to buy Company ABC shares; you
would go to the physical market on which the shares are
exchanged say, the London Stock Exchange, and make your
purchase. In another example, if you desired to buy gold on
the cash market, you could visit a coin dealer and trade cash
for gold.

Derivative Market :
The derivatives market is the financial market for derivatives,
financial instruments like futures contracts or options, which
are derived from other forms of assets. The market can be
divided into two, that for exchange-traded derivatives and
that for over-the-counter derivatives. The legal nature of
these products is very different, as well as the way they are
traded, though many market participants are active in both.
The derivatives market in Europe has a notional amount of
€660 trillion.
Participants in derivative market :

Participants in a derivative market can be segregated into

four sets based on their trading motives.
 Hedgers
 Speculators
 Margin Traders
 Arbitrageurs
Difference between cash market and derivative
market
Basis for Cash market/Spot Derivative market
comparison market
Meaning A place where Future market is a
financial place where only
instruments are future contracts
traded, wherein are bought and
the delivery of sold at an agreed
stock takes place. date in the future
and at a
predefined price.
Ownership When you buy You can never be a
shares and take shareholder when
delivery, you you trade in
become Futures.
shareholder of the
company till you
hold the shares.
Delivery It is done on T+2 No delivery takes
days. place as the
 Future contract
expires on
expiration date.
Payment Full amount Only margin
needs to be money
paid at the requires to be
time of buying paid for
shares in cash. initiating
Future
contract.

Lot size One can buy One has to buy

even single a minimum lot
share of size which is
company. already
defined. Such
as in case of
NIFTY lot size is
75.
Holding period In cash market In futures, you
you can buy have to settle
shares and the contract on
hold for life. the expiration
date i.e.
maximum of
three month.
Dividends When you are In future
shareholder of contract you
the company, are not entitle
you are for any
entitled to dividend.
receive
dividend.
Objectives People buy Futures can be
shares in cash traded for
market for Arbitrage,
investment hedging or
purpose speculation
purpose.

Conclusion:
Cash Market and Future Market both are the financial
exchange market where government, the general public, and
companies get a common platform for trading in financial
instruments. The two terms are similar in some respect, but
differences between them still exist.
Bibliography :
https://www.trade-24.com/spot-market-trading

https://keydifferences.com/difference-between-
cash-market-and-future-market.html
Guru Nanak Khalsa College
For Women
( Model town , Ludhiana )

Subject : Financial market

instruments

Topic – Cash/ Spot market &

Derivative market.

Submitted to : Submitted by:

Ms. Pratibha Tyagi. Neha Sharma
(Dept. of commerce) Roll no. 2437
M.com 2nd yr