The spot market is a place where people trade assets that should be delivered as soon as possible. As an example, imagine I need Yen, and I need them ASAP. I could buy those Yen on the spot market and have them delivered, usually within 2 days. The price I pay is the spot price right now; this price can change all the time. This seems like a very logical way to do business. The spot market is also known as the cash market, as one has to pay in cash, and get delivered a physical product-either live hogs, money, shares (this is an important one), crude oil or power. The fact that there is something called a spot market implies that there also is something that is not a spot market. This is true; one could also trade on the futures market. On the futures market, I can engage in a trade that will get me my goods in the future, maybe a month, maybe half a year, maybe a few years.

Now, where should I trade? That depends. If actually need the asset I am trading, I might decide to do it in the spot market if I need it now and in the futures market if I need it in the future. But, maybe I'm just speculating or hedging. So, imagine I want exposure to the price of lean hogs; I want to make money when the price of lean hogs goes up. If I buy a futures contract, say with a time to expiry of one year, I'll buy the contract, and I can sell it again. No hogs get moved, just a piece of paper. If the future goes up, I make money; if it goes down, I lose money. The only other requirement is that I have to post some collateral in a margins account, perhaps 10% of the value of the hogs. However, if I were to do this trade on the spot market, there are two possibilities. Either I get a warehouse receipt telling me where my hogs are, or a few rather large cattle trucks will pull up on the driveway. In either scenario, I would have to feed the hogs and get rid of their excreta. I would also be due the full price of the hogs. I would then have to babysit my hogs for a few months, hope they don't die, and then sell them again. Pretty complicated.

This example serves to illustrate why so many people trade futures. What is true is that the future eventually gets setteled on the spot price: they converge. This means that if I have a future on my hogs, and I don't sell it, I will have to buy these hogs at the spot price in one month. It is worth mentioning that this practical issue doesn't exist for shares; there is little incentive not to just hold shares. Hence, most share transactions are conducted on the spot market.

The spot price and future price are not necessarily the same. The difference is in two things: interest and carry. Interest is simple. If I buy something now, I pay immediately, losing the cash. This cash won't generate interest for me. For this reason, the future would be higher than the spot. Carry is the yield of having the asset. This yield can be negative: having to feed hogs, having to store crude oil, having to guard a pile of gold. It can also be positive: if a share pays a dividend, the person holding the share will get it, not the person holding the future. A negative carry increases the future price further, while a positive carry makes it lower than the spot price

In summary, the spot market is a place where one can buy assets, such as commodities and shares, for immediate delivery. It is the normal place to trade shares; for commodities, the futures market is usually a more natural place to trade due to the practical difficulties of moving and storing large amounts of commodities. For a private investor, the most relevant spot market is the stock exchange.

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