What is the spot price?

Spot Price: The price at which an item, such as a security, commodity, or piece of money, may be purchased or sold for prompt delivery is known as the spot price. Spot prices are location- and time-specific, but in a global economy, the spot price of most stocks or commodities tends to be relatively constant across the board after considering exchange rates. Instead of a spot price, a futures price is the agreed-upon price for the asset’s future delivery.

Basics of Spot Price

The price of commodity futures contracts, such as those for wheat, gold, or oil, is most often mentioned in connection with spot prices. This is a result of spot trading in equities. You purchase or sell stocks at the indicated price, which you then convert into cash.

The current price of a good, anticipated shifts in supply and demand, the risk-free rate of return for the good’s holder, and the expenses associated with shipping and storage in connection with the contract’s maturity date are often used to calculate the price of a futures contract. Contracts for futures with closer expiration dates often have lower storage expenses than those with longer maturities.

Spot prices are constantly changing. Although the price of a currency, commodity, or security matters for quick buy-and-sell transactions, it could matter more for the extensive derivatives markets. Buyers and sellers of stocks or commodities may use options, futures contracts, and other derivatives to lock in a specific price for a future date when they want to deliver or take ownership of the underlying item. Buyers and sellers may reduce some of the risk associated with continuously shifting spot prices by using derivatives.

Additionally, agricultural commodity producers may protect the value of their products against market swings by using futures contracts.

The Connection Between Futures and Spot Prices

The pricing of futures contracts may change significantly from spot prices. Prices for futures may be in backwardation or contango. Futures prices fall to match the lower price in a contango. The rising futures price to match the higher spot price is backward. Since futures prices will climb to match the price as the contract approaches expiration, backwardation tends to favor net long holdings. Because the futures lose value as the contract nears expiration and converges with the lower spot price, contango is favorable to short positions.

Futures markets can transition between contango and backwardation and persist in either position for lengthy periods. Futures traders might benefit from examining both spot and futures pricing.

Spot Price Examples

The spot and futures prices of an asset may vary. For instance, the price of gold maybe $1,000, while its futures price might be $1,300. In the same way, prices for assets in the stock and futures markets could fluctuate in various ranges. For example, Apple Inc. (AAPL) can be trading at $200 in the stock market, but its options’ strike price might be $150 in the futures market, indicating that traders have low expectations for the company’s future.

Conclusion

• The spot price is the price traders pay to immediately deliver an object, such as a security or a piece of money. They are constantly changing.
• Futures prices are associated with spot prices, which are used to calculate them.