Spot Price

A spot price is the current market price of a commodity, financial product, or derivative product. An investor or trader can buy or sell the given asset or security for immediate delivery at this same price.

To own safety, a buyer needs to pay the spot price right now, and the seller should deliver the security at that very moment. A spot price is defined by the number of buyers and sellers interested in trading in that security, commonly referred to as depth. It is the reference or starting point for pricing many financial products.

• A spot price refers to the current market price of the commodity, financial product, or derivative product.
• It is the number of buyers and sellers wanting to trade in the security, commonly called depth.
•  It is more of an economic concept instead a mathematical part. It is added to the storage and various tangible costs for commodities.
• The spot price for all accounting and calculation purposes is the same globally.

The spot price chart reflects how things are perceived in the market for that particular security. It can be checked in-depth and gives an account of the number of buyers and sellers at a specific period.

For any commodity like metal, security, or any other type of financial product, the metals spot price or price of the other products is of utmost importance. Be it the commodity cost of carrying or futures contract price three months down the line, it has to start from somewhere, and that starting point is called a spot price. Any additional price or calculation must be done, keeping the current price as the reference.

Further, it can be studied to identify market trends, arbitrage opportunities, or derivative pricing. Most often than not, traders across the planet analyze the bond's spot price chart, not only the current ones but also for 3-4 years down the line, to identify the trend and supposedly predict a recession.

There is no mathematical formula for expected spot price. It is more of an economic concept rather than a mathematical part. At any point in time, forces of demand and supply play an essential role in determining the market price. For accounting purposes, this will be reasonably uniform worldwide. It is very different from futures or forwards contracts because those are agreed-upon prices based on some deal.

The metals spot price  is added with the storage and other tangible costs for metal or commodities. On the other hand, for financial products like futures – the spot price is added with the carry cost of that product based on the prevailing interest-free rate. There will be other factors involved, like the credit risk and market risk, but the price is most often the reference point for all this analysis.

The following Apple stock price chart can provide individuals with a clear idea regarding the concept of spot price. 

Source

One can use the above chart to track the spot price of the stock. It can offer insight into how market participants perceive the stock. As one can observe, the spot price or current price at the time of writing is $169.24. It keeps changing owing to several factors, like demand and supply, changes in laws and regulations, geopolitical events, etc. 

Besides knowing the spot price, one must analyze the price chart of a financial instrument before making any trading decision. 

Individuals can find similar charts of other stocks, commodities, currency, etc., on the TradingView platform to track the spot prices.

Consider the spot price example of the stock of Alphabet, Inc., which is quoted at $1,200. It means that a trader interested in this stock needs to spend $1,200 to own it right now. As soon as the trader does so, they will transfer Alphabet shares to their account within two days.

Contract details will be recorded and will initiate the trade at that very moment. There is also another way the trader can get these shares by buying the futures contract, which will be different depending on expiry.

As per contract, a pre-decided quantity will be transferred to the trader’s account at the expiry date. When the trader pays a certain amount and gets instant delivery, it refers to the spot price. And the latter relates to the future price.

As shown above, the market prices change with time. It varies with time and depends on the number of buyers and sellers. When there are more buyers, the price will rise, and the expected spot price will start decreasing when sellers are more. So we can say from the above spot price example that the  price trend reflects market participant behavior.

Let us look at the various uses of the price.

Contango

Traders use the spot price to determine the security trend or the financial product. It is done by analyzing the current price, the future price, and the difference, called a basis. Under normal circumstances, one would assume that the future cost would be greater than the spot price. It is because leaving all factors aside is the time value of money. A positive risk free rate should always be added to the spot price to derive other expenses. This scenario is known as Contango when the futures price exceeds the spot price.

Backwardation

On the other hand, Backwardation is the scenario when the future price is less than the spot price. Eventually, both prices will converge on the expiry date. The former gives an optimistic picture of the security, while the latter denotes that the security price is going south. Traders will look to short the security in such a scenario.

Arbitrage

The spot price for all accounting and calculation purposes is uniform worldwide. However, there can be times when these prices differ. For example, the stock price of Google’s parent company – Alphabet, is different on NYSE and NASDAQ. Though unexpected, if such a scenario arises, traders will take full advantage of the same. They will remain long where the stock quoting is low and short where it is priced higher.

As soon as more traders try doing that, both exchanges' prices will converge and eventually match each other. This situation is called arbitrage, and such opportunities are pure gold for traders, which they would never want to miss. Because the trader is looking for arbitrage, such opportunities either do not exist or exist for a very short duration. Thus eventually making the financial markets much more efficient.

• Spot price is used to transact and pay immediately, whereas futures price is used when payment and delivery is made at a predetermined date of the future.
• In situation like contango, the spot price is less than futures price. In backwardation, it is just the opposite.
• The former is used to determine the latter’s price, but the latter is not used to determine the former.

It is a guide to what is Spot Price. We explain its differences with futures price, along with examples, how to calculate and its uses. You can learn more from the following finance articles –

• Derivatives Product Types
• Limit Order Types
• Spot Rate
• Carrying Amount Definition