Spot Market trading is used to refer to transactions that occur in other investment types, as well as those that only occur in this manner, that involve an immediate (or nearly immediate) exchange of the elements of the trade. This type of trading can be seen on the commodities market, less commonly among some other instruments, and most notably on the volatile foreign exchange market.
On the commodities scene, spot market trading simply means that instead of exchanging a post-dated contract, which would normally see the commodity being supplied at a later date, for the price specified on the contract, the commodity is delivered immediately, or very shortly after the trade is completed. This changes the way the economic fluctuations, such as supply and demand, affect pricing. Unlike the usual commodities trading which is less affected, by supply and demand, due to the agreement on purchase well in advance, spot market trading is executed immediately and is therefore more volatile. The price of a commodity in this type of trading can change throughout a given day and is greatly, and rapidly, influenced by external factors such as a sudden shortage, or surplus, of the commodity. This type of trading is therefore more attractive to investors who seek a higher-risk, with higher return, environment. Investors in such a market could buy, and sell, the same commodity in a single day and make a huge profit if market factors play in their favour. It isn’t hard to see why many investors prefer spot market commodity trading.
Possibly the most famous, and infamous, spot market in the world, is the global forex (foreign exchange) market. This type of trading deals with transactions immediately, through instantaneous transfer of funds between international currency accounts. This type of market is attractive for a number of reasons.
It is probably the most liquid market for the average investor, one that can be gotten into, and out of, in seconds, whenever the investor chooses to do so. It is correspondingly volatile and returns can be generated, or lost, just as quickly. Making this type of spot trading even more potentially profitable, and risky, is the usual practice of buying “on margin”. This enables investors to purchase far more than they could otherwise because their “broker” puts up funds for them to make a higher investment. The benefit to this is that they can earn the returns due to a substantially higher initial investment. The downside to this is that they can lose such a value as rapidly. The great risk associated with this particular spot market deters many would-be investors, but rich rewards those courageous, and lucky, enough to do well in it.
Other, more obscure, spot markets are there. The main principle of spot market trading is the speed with which transactions are executed and the corresponding speed with which profits can be generated. This type of investing can be very lucrative but should be properly researched before any significant funds are invested, especially for the forex market.
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