Spot Price

In the investment and trading world, do you know that it is the Spot Price of the security on which traders and investors make predictions about the future value fluctuation of the security? 

If not, then we recommend you to go through the information below so that you must know what the spot price means and how important it is in the stock market. 

Spot price represents the share market prediction for the security’s future costs. Particularly if there should be an occurrence of commodity futures contracts, the spot price allows a trader or an investor to discover the future cost of the commodity. 

Spot costs are regularly referred to as in relation to commodity futures contracts, for different commodities like, wheat, gold, or oil contracts. That is on the grounds that stocks are continually changing on the spot.

Also, know the difference between Stock and Shares. For that read Stock vs Shares in detail and reap the fruits of the knowledge.

At the current market cost, you purchase or sell a stock, further trade the stock for cash.

Let’s have a deeper look into the main topic by beginning with an understanding of its meaning.

Spot Price Meaning

The Spot Post is the current cost in the marketplace at which a security, commodity, or currency is available to be brought or sold for instant delivery.

As such, it is the cost at which the stock market traders and investors fix an asset at the trading moment. 

In spite of the fact that spot price can change by time and geographic areas, the amount is genuinely uniform in financial service sectors. 

Mostly, spot prices are considered in relation to the forwards and futures trading contracts. One reason for the formation of such financial agreements is to “fix” the ideal spot price of a commodity at a fixed date in the future.

Thus, Securing costs by using the “fix” or “lock-in” feature with derivatives is quite possibly the most widely recognized way in which an investor can reduce risk and lead to stress free trading at the same time.

Perhaps, the primary reason for doing so is that the prices of stocks, shares, or other securities continually change because of high fluctuations in the security market. 

No doubt, that it is a critical variable in deciding the cost of a future contract. It can show assumptions regarding volatility in future commodity costs. 

Another key feature of Spot prices is that they are persistently changing – they fluctuate as per shifting market supply and demand.

The key to remember the term “Spot” in the financial service sector is to relate it to the “right now” or “immediately”. 

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Spot Price Example

A particular asset can have a different spot and future price.

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Let’s understand this with the help of an example

At the current time, Gold may have a spot price of Rs. 49,000 while its future price may be Rs. 53,000. 

Similarly, the price of various securities can be traded in different ranges in the stock market and futures markets.

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For example

The stocks or shares of TCL India also known as Telephone Communication Limited can be traded at Rs. 1060 per share in the stock market but the strike price on its options contract can be Rs. 960 in the futures market, considering pessimistic or fearful trader assumptions of its future. 

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Spot Price and Future Price

Many people get confused between the spot price and future price. Although they look similar, they are very much different from one another. 

On one hand, Spot Price is the fixed price at which a security, commodity, or currency is ready to be traded-bought or sold- for immediate delivery, Future Price contracts also include trade in the commodity, currency, and security in which the price is fixed during the delivery time of the trade happening in the future time. 

But, let’s not stop here and have a look at some of the differences prevailing in the spot price vs future price. 

 

Let’s have a look at some of the more details. 

The differentiation between a spot price and a futures contract price can be vital. Contango and Backwardation are the only two ways in which a future price is differentiated. 

So, let’s have a quick glimpse at both of them in a table form:

 

Contango underpins short situations since the future price loses value as the agreement arrives at expiry and the lower spot price converges.

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Spot Price and Strike Price

Now, a majority of the chunk might be confused between Stop Price and Strike Price. Many investors, traders, or financial agents might believe that they are similar however, that’s not the case. 

They are totally different from one another! 

• Spot Price: It is the current value of the asset at which the trade is executing immediately or at the moment. 
• Strike Price: However, Strike Price, which is also known as exercise price, differs from stop price as it is the value at which you can trade on the underlying asset or security only when you exercise Call Option.

Not just call, you can use it while selling the underlying security or asset using the Put option.

Stop Price = “Now”

Strike Price = “If Options are exercised”

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Closing Thoughts

In a nutshell, the Spot price is an important term used in financial services. Generally, it is misunderstood with strike price and future price, however, it is different from them. 

It is the most used term in the Stock market which determines the present cost of any asset. 

To calculate the spot price, a trader and an investor can study the previous three to four-month cost of an underlying asset or security and can predict the spot price of the same.

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