If you’ve gotten yourself acquainted with a commodity marketplace, you might’ve heard of the term “spot market.” Most likely, you’ll have heard of this when also hearing about commodity purchases. Well, what is the spot market? The “spot market” is a term that relates to the commodity marketplace and is pointed at the price at which you, or anyone else, purchases a certain commodity.
That said, if you’ve never dealt with bulk commodities like oil, chances are you’ve never heard this term before. However, we’ve put together a simple guide to let you know the basics on spot markets in the commodity marketplace. But before we start on that, let’s talk about commodities first:
What’s a commodity?
Commodities are the items you buy and sell in a commodity marketplace. It can range from products like soybeans and corn, all the way to other, more essential products like fuel and oil.
In these markets, there are a few ways you can purchase the items at specific prices. First, you’re given the ability to use forward contracts. Forward contracts allow you to agree on a set price to be paid in the future for a certain number of items, no matter the actual cost of what you’re buying. This is useful in many scenarios, such as oil buying. If you’re purchasing a set amount of fuel to last the next year, you can set a certain amount and pay a certain price, meaning that you’ll get what you pay for, no matter if the value of oil rises or falls.
However, there are situations in which you might need to buy extra fuel because you didn’t buy enough. This leads us to the second way to purchase the commodity, which is to buy it on the spot market.
What is buying on the spot market?
Simply put, buying on the spot market means that you’re purchasing according to today’s price. For example, imagine you’ve set a future contract for fuel at $10 per barrel. Unfortunately, you find yourself needing more fuel a few months later, but the price of a barrel is now $12. While you’re still receiving the $10 barrels you’ve paid for, any extra fuel you buy will be charged at $12 or whatever the price is on that specific day.
While this happens occasionally in commodity markets, it is more common in spot commodity markets in which people like you can quickly purchase small amounts of raw ingredients to ensure that you have enough supplies of a certain material to keep your business running.
Spot markets versus forward contracts
So, what’s the difference between spot markets and forward contracts? Well, while we’ve pointed out that forward contracts are geared more towards future purchases, spot market commodities are purchased, well, on the spot. Additionally, spot market prices are generally much higher because when you find yourself needing more fuel, chances are other people also need it, putting the commodity in high demand.
Remember, though, that spot market prices aren’t always higher. It just means that the amount of the raw material you’re going to purchase is set at a specific price for that day.
Conclusion
If you find yourself dealing with the term “spot market,” you now know exactly what it means. Not only that, but now you know how to get yourself more of a specific raw material if you find that your future contract isn’t providing enough to ensure that your business is still in production.
Are you looking to deal with an online spot commodity marketplace in the UK? Get in touch with us to see how we can help.