Spot (cash) Market
The spot market is one of those areas of finance that most people really know nothing about. Those who are even aware of its existence really have no idea what goes on there. In fact the spot market is not all that hard to understand. It is simply a place in which commodities and currency can be bought for immediate delivery rather than as a futures contract.
The concept of the spot market confuses a lot of people, mainly because their main frame of reference for investing is the stock market. The spot market is one in which you are buying and selling an asset in which payment will be made immediately and the asset will then be delivered immediately. This is how most markets work so it confuses people that there would be a specific market for this type of trading. Where it comes into play is for commodities and for currencies. Normally they are traded as futures contracts. The spot market is used primarily with commodities to close out trades. If you sold a futures contract you are hoping that the price of the commodity will decline before you have to deliver it. When the time comes for delivery you will buy the commodity that you need in the spot market. It is used in the same way in the currency market but it the spot market is also used directly for speculation on currency as well.
The reason that you would want to use the spot market to speculate on currency is because it tends to be more volatile than the futures market. Because of the time value of a futures contract they really don’t fluctuate in value as much as the spot market does. This volatility potentially means you can make more money since the price can change more quickly. Of course you can also lose more money as well. The same thing is actually true of the commodity market but most people don’t use the spot market to speculate on commodities because of the risk of having to take delivery. If you buy a spot oil contract and for some reason you can’t get out of it fast enough they are going to deliver the oil to your house. Not something that you want.
The spot market is used primarily by professionals who specialize in this kind of trading. It is very important to know what you are doing if you are going to get involved. There are a number of strategies that you can use but you have to make sure that you have one. This is not like the stock market where you can get away with guessing about when to buy and sell. You have to have a plan before you start in the spot market. The main thing is to make sure that you have good money management skills or you will quickly find yourself broke.