The spot (cash) market is one of those things that you hear professional investors talking about but which most post people are unfamiliar with. The spot market is simply one in which when you buy something you pay for it and it is delivered right away. We are all familiar with on spot market that being the stock market. As an investor it really isn’t critical that you understand what the sport market is in order to make money. It is one of those things that it is good to know more out of personal interest than any real need. If nothing else it is nice to know what the pros are talking about.
The spot cash market is any market in which financial instruments are traded and are paid for and delivered immediately. This is the opposite of the futures market in which the underlying asset is delivered in the future. The spot market that everybody is familiar with is the stock market. Stocks are bought and paid for and then they are immediately transferred into your account. There are however a few other spot markets that it is worth knowing about, far and away the largest would be the spot currency market.
The forex market is generally traded as a spot market rather than as futures market, although there is also a futures market for currencies. The reason for this is that currency is something that rather than taking physical delivery of it is simply credited to your account. Turning your US dollars into Euros is a simple matter of changing the way they appear in your account. This isn’t the case for something like cattle. This is where you would want to trade futures because the last thing that you want is a herd of cows showing up at your door.
The other big spot market is the energy market. When energy providers have a surplus they can sell it to other energy providers who have a shortage. This is usually done as a spot transaction because you can’t really store electricity for future delivery. The spot energy market isn’t really something that you can invest in since it is largely restricted to the energy providers trading amongst themselves however it is a good example of how the market works.
From the viewpoint of the investor the spot market really isn’t that different from the futures market. The only real difference is whether or not you end up taking delivery. Largely this will depend on how practical it would be for you to take delivery of the asset. This is just something to be aware of so when you hear people talking about the spot market or the cash market you know what they are talking about. This will at least make you feel better about your investment knowledge even if it really doesn’t help to make you any more money.