Definition: The spot price is defined as the current market price of a given asset that will be immediately delivered. To put it more simply, it is the price that has to be paid for an asset to get it right now.
What Does Spot Price Mean?
Spot price is a financial term that is normally used in securities or commodity transactions. In the case of the commodity market this would be a transaction such as buying raw material from a wholesaler that will dispatch the merchandise very quickly.
In contrast, future prices are those you pay today for goods that will be delivered in the future. Spot prices are very volatile, since there are many elements in play when it comes to commodities, the same happens with other securities. This is why companies plan their purchases by using futures contracts that allow them to eliminate the risk of having sudden changes in raw material prices.
This definition of a spot price is easier to understand if we explain it by using a common transaction as an example.
Example
Fruit Boom LLC is a big store located near a beach that sells juices to locals. They sell orange juice for $1.5 a glass. The company normally purchases the oranges at a local wholesaler at $2 a pound, but since the operation is expanding and orange prices have been very volatile they would like to purchase a futures’ contract for oranges. The contract states that a 100 pound of oranges will be delivered the next month and the company has to pay $1.5 a pound right now to enter the contract. In this scenario, which one would be the spot price?
As we previously stated, a spot price is the current market price of goods being delivered immediately. In this case, the spot price of the oranges would be $2 a pound, since that is the price the company has to pay to get the oranges immediately.
