The spot price is the price at which an asset can be bought or sold for immediate delivery. "Immediate" means on the market's standard settlement date, which may be the same day or a day or two later depending on the asset. Spot prices are quoted for commodities such as oil, gold and wheat, for currencies, and, in practice, for shares and bonds traded for normal settlement.
The spot price is contrasted with the price in a forward contract or futures contract, which is agreed today for delivery at a later date. The gap between them reflects interest, storage costs and expectations, and gives rise to market states known as contango and backwardation. In foreign exchange, the spot price is usually called the spot rate.
Spot price in plain terms
Buying apples at a market stall is a spot deal: you pay today's price and take the apples home now. Agreeing with a farmer in spring to buy a crate of apples at a fixed price in autumn is a forward deal: the price is set now, but the apples and the money change hands later.
The spot price is simply the "right now" price. It changes constantly as buyers and sellers react to news, and it is the reference point against which all the "later" prices are compared.
How spot prices are set
Spot prices come out of trading between buyers and sellers, through a process of price discovery. How that happens depends on the market.
- Foreign exchange. Spot currency deals between banks normally settle two business days after the trade (T+2), with some pairs such as US dollar against Canadian dollar settling in one day. Quotes come from the interbank foreign exchange market.
- Gold and silver. Spot prices are quoted continuously in the over-the-counter London market, and twice-daily benchmarks known as the LBMA Gold Price and LBMA Silver Price are run by an independent administrator and used to value contracts and holdings.
- Crude oil. Physical cargoes are often priced against assessed benchmarks, such as Dated Brent, published by price reporting agencies from reported deals, bids and offers.
- Agricultural goods. Local "cash" prices at grain elevators and ports are often quoted as a premium or discount to the nearest futures price.
Because many physical markets are thin, the most heavily traded futures contract often leads, and spot prices are set relative to it. News headlines about "the oil price" usually refer to the front-month futures contract rather than a strict spot price.
Spot price and the basis
The difference between the spot price and a futures price for the same commodity is called the basis:
- is the spot price today.
- is the futures price for a given delivery month.
Suppose wheat sells locally at $6.20 a bushel and the nearest futures contract trades at $6.50. The basis is , or 30 cents "under". A negative basis usually reflects transport and storage costs and ample local supply; a positive basis signals local scarcity. As a futures contract approaches expiry, its price and the spot price converge, because a trader could otherwise profit through arbitrage by buying in one market and delivering into the other. Changes in the basis are the main risk left after hedging, known as basis risk.
What moves spot prices
Spot prices respond to current supply and demand: production outages, weather, inventories, shipping disruptions and sudden changes in buying. They also reflect expectations, because stored goods can be held back for later sale. A supply shock usually shows up first and most sharply in spot prices. Spot prices of a commodity tend to show high volatility, because supply and demand are slow to adjust in the short run.
For currencies, spot rates are driven by trade and capital flows, interest-rate differences, central bank policy and risk sentiment. The forward exchange rate is then derived from the spot rate and the interest rates of the two currencies.
Uses in practice
Spot prices are used to settle physical trades, to value inventories and investment portfolios at market value, and as the underlying reference for many derivatives. Central banks and statistics offices track spot prices for energy and food because they feed quickly into consumer inflation. Producers, traders and investors compare spot with forward prices to decide whether to store, sell now or lock in a later price.