What is Spot Market?
A spot market is a financial marketplace where a variety of securities, stocks, commodities, and currencies are immediately exchanged for quick delivery. Delivery means the transfer of an asset in return for cash. It is expected within the spot market framework for settlement to transpire within a time frame of T+2 working days. I.e., the exchange of cash and commodities is mandated to occur precisely two working days following the date of trade.
Spot Market Explained
In finance, the functioning of a spot market involves a real-time implementation of delivery and cash payment. However, In most well-regulated markets, the settlement process, which summarizes the transfer of cash and physical delivery of the instrument or commodity, generally happens within a span of 2 working days (T+2). Despite the slight delay in settlement, the contractual agreement between the buyer and seller appears immediately at the prevailing prices and existing quantity.
It stands in contrast to forward and futures markets, where involved parties mutually consent to trade at a predetermined forward/ future price of the underlying asset, with the delivery of the asset anticipated at a later date. I.e., unlike spot markets, forward/future markets establish an agreement in the present, with the settlement projected for the future. Spot markets can effectively operate wherever the necessary infrastructure is in place to facilitate such transactions, showcasing their adaptable nature across diverse market settings.
Example of Spot Market Transactions
Mr. Lakshman attempts to acquire 1,000 TCS shares on the National Stock Exchange of India (NSE). Without delay, Mr. Lakshman communicated with his broker to secure the shares at the ongoing market rate; let's assume it to be ₹2,500 per share. The broker promptly facilitates the transfer of funds totaling ₹2,500,000 to the seller. Following the successful clearance and receipt of the funds by the seller, the ownership of the shares was transferred to Mr. Lakshman