The term "Spot " refers to the spot market, where financial instruments are bought and sold for immediate delivery.
In the financial world, different markets allow different types of transactions.
Among them, the spot market has a unique position as an instant trading venue.
Let’s explore the concept of “spot” and how it works.
Spot definition
The term “spot” in trading refers to the spot market, a market where financial instruments (whether commodities, securities or currencies) are bought and sold with immediate delivery.
The word "live" is derived from the phrase "live" - meaning "now" or "live".
In other words, the exchange of cash for real assets happens "on the spot."
“Spot Price” refers to the current market price at which an asset is purchased or sold for immediate delivery.
Spot Market in Forex Trading
For example, in the spot foreign exchange market, currencies can be traded immediately or "spot" using current market prices.
If you buy EUR/USD, this means you are buying Euros and selling USD at the current exchange rate.
Settlement of this transaction (currency exchange) happens almost instantly.
But in actual operation, the actual physical exchange of currencies in spot foreign exchange transactions usually takes two days, that is, T+2 settlement.
"T" represents the transaction date (when the order was placed) and "2" is the number of business days required for the transaction to settle.
Keep in mind that although the physical exchange of currencies takes two days, the terms of the transaction (exchange rate) are agreed upon immediately, hence the term "spot".
Spot vs. Futures and Forward Markets
The spot market contrasts with futures and forward markets, where delivery and payment of an asset occurs at a future date.
In these markets, contracts are made based on a prediction or agreement of prices at a future date, known as the delivery date.
In spot market transactions, both parties agree to trade at the current market price and settle "on the spot."
It is important to note that while the agreement and price are settled immediately, physical delivery of the asset usually takes some time.
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.
