What is a spot (cash) market?

A spot or cash market is a market in which commodities or currencies are sold for cash and immediately delivered. Trades that take place in futures (contract) markets expiring in the current month are also called spot market trades. Spot markets can operate wherever an infrastructure exists for conducting the transaction. The internet does a lot of security spot market trades.

The spot market is sometimes called a "physical market" because the prices are settled in cash on the spot, as opposed to forward prices. A good example is crude oil. The crude oil is sold at spot prices, but the actual delivery occurs in one month or less.

Spot market prices are made known to the public almost as soon as deals are transacted. Spot markets can be privately operated or controlled by government or other organizations. A prime example is producers of surplus energy. They are able to locate buyers for energy, negotiate prices and deliver actual energy to the customer a few minutes later. Natural gas is a good example of an energy spot market. Grain, gold, and RAM are other good examples of spot market.

Spot Market Terms Broken Down:

Nature: A contract entered in the spot market is effective immediately. The prices are settled at current prices versus future prices. The primary activities of buying and selling are carried out in spot market. Securities can be traded and money can be transferred directly over the internet. Grains, cotton and other agricultural commodities are traded at the farms and are part of a spot market.

Spot Forex: For a foreign exchange transaction it takes two days for cash movement through bank channels across the countries. This is still considered a cash market because two days is the minimum required time to clear money transfers.

Energy spot market: Producers of surplus energy find buyers, negotiate the price and deliver the energy within minutes. This market can be controlled by government agencies, private operators or industry organizations.

Spot market and farmers:

While spot market provides a ready market for the farm produce which reduces the farmer's cost on transportation and warehousing. There is a large wide gap between the farm gate price and the consumer price. The traders in this market enjoy monopoly and there is less transparency in pricing. The farmer would be put into a loss unless he has complete knowledge about the prevailing price.

To protect farmers from these types of difficulties, NAFED and other cooperative organizations stepped in. They have been successful in helping small producers and larger farmers by reducing the number of intermediaries involved in the trade process.

Cash markets or spot markets are quite different from other aspects in the market. A good comparison is the future market. Anything can go wrong at any stage in a future market, making this is a high risk investment. Political equations in certain things like crude oil prices, can greatly effect the future market. If you invest in crude oil in a cash market, you have a set price that day, and that price could double the next day. This is why those who trade in the future market trust their own luck and several equations.

A great benefit to a future market is there is a guarantee for payment for a farmer and the quality risk is avoided. This helps a farmer with their cash market trading because it increases the bargaining power of the farmers and enables decisions on crop sowing and time of the sale.

Having a good investment firm to represent you in the cash market will help you save money and lower your risk. Invest money in a trusted, established investment firm and allow them to do the bargaining for you.