The spot market is the market where the prices of financial instruments (for example, currencies, commodities, stocks, cryptocurrencies) traded instantly are determined. At the same time, they are instant buying and selling transactions over the last price of a product. Buying or selling transactions in the spot market take place after a maximum of two business days after the price determined on the transaction date.
What is Spot Market (Cash Market)?
The spot market, also known as the “cash market”, refers to the purchase or sale of a financial product at the last price, within a maximum of two business days. The price is determined by supply and demand. When trading in the spot market, an investor can only use the assets he has, that is, there is no leverage during the transaction.
Centralized exchanges are legally compliant and secure to make trading easier, and they charge commissions for transactions. Decentralized exchanges offer a similar service, but through blockchain smart contracts.
What is Spot Price?
The current price of a financial instrument is called the spot price. The price at which an instrument can be immediately sold or bought. Buyers and sellers create the spot price by issuing buy and sell orders. In liquid markets, the spot price can change from second to second as orders fill and new ones enter the market.
On the other hand, if the forward prices rise above a certain limit (in line with the market interest rate) compared to the spot prices, sales in the market begin as forward rather than spot. In other words, the supply of forward contracts increases, resulting in lower prices in the futures market. On the contrary, if the prices in the futures market fall below a certain limit compared to the spot prices, sales are diverted from the forward market to the spot market.
How Spot Markets Work
Spot markets are also called “physical markets” because trades are effectively exchanged for assets instantly. When the working style of spot markets is examined; While the official money transfer between the buyer and seller can take up to 2 days, both parties accept the trade “immediately”. This means that the non-spot, or futures, currently agrees on a price, but the delivery and transfer of money occurs at a later date.
Futures on contracts that are about to expire are also sometimes called spot transactions because the contract that expires means the buyer and seller will immediately exchange cash for the asset.
Spot Market Examples
Examining the spot market example for Bitcoin, a chart of the BTC/USDT spot trading pair is seen. BTC is the base currency, the first currency to appear in the currency pair. It is usually followed by the quote currency USDT. In this market, investors can buy and sell BTC for USDT or use USDT to buy BTC.
Spot market examples can be listed as follows:
- Commodity markets: Commodities such as gold, silver, oil
- Currency markets: Currency pairs such as EUR/USD, GBP/USD, USD/JPY
- Stocks on the stock exchanges: Stocks in stock markets such as Apple, Microsoft, Amazon
- Cryptocurrency markets: Cryptocurrencies like Bitcoin, Ethereum, Ripple
Advantages of Spot Market
The spot market offers many advantages to its users. First of all, the fact that these markets can be reached 24 hours a day is a great comfort for users. In addition, fast processing can be done at low cost.
Spot market advantages include:
- Opportunity to trade quickly and instantly
- low costs
- Being open 24 hours
- Lots of different product options
- Worldwide liquidity level
- a regulated market
- Automatic trading option
- Ability to trade with small investment
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