Posted in Finance, Accounting and Economics Terms, Total Reads: 414
Definition: Spot Price
In a spot contract, goods are sold/ bought at the current market price at a specified time mainly for immediate delivery and payment. The price at which the contract is settled is known as spot price/ spot rate. This is quite in contrast with the forward contract in which the goods and assets are sold/ bought in the future but the price is decided immediately. Since the spot price varies continuously, so investors usually use the forward contracts to avoid the risk of continuously fluctuating prices.
Spot price of a security will be its explicit value in the market at any given time and its future price will be the expected value given the current spot price and time frame. Spot prices are often used to predict the future commodity prices. In securities or non-perishable goods like silver, spot prices will be used to predict the future market price expectations but in perishable goods, it only tells about the current supply and demand.
If there is a very large difference between the spot price and the future price then this may be because of the reason that the market is trying to predict what the future prices will be. Future prices of the goods can be either higher or lower than the spot prices which will depend on the market fluctuations and the future demand and supply.
If today, the spot price of gold is $1500 per ounce on the New York Commodities Exchange (COMEX). So at this particular moment, one ounce of gold can be purchased at that price. This price will be known as the spot price. But if the same ounce of gold was to be delivered in future, say a year later, then the future price of ounce of gold will be $1600 for the future delivery and payment but at the agreed price.