The difference between spot and futures markets

• A special feature of trading commodities is that you can trade either on the spot market and/or on the futures market

• In the spot market, commodities are traded for immediate delivery and are therefore quoted at their current spot price

• In the futures market, commodities are traded for delivery at a pre-agreed time in the future and at a pre-agreed price

A special feature of trading commodities is that you can trade either on the spot/spot market and/or on the futures market. As a CFD trader, it can be helpful to understand the intricacies of each type of market as these affect the underlying values ​​of these instruments.

The cash market

The spot market (also called the spot market or physical market) is a market in which commodities are traded for immediate delivery and are therefore quoted at their current spot prices. Therefore, the spot market is influenced by economic events affecting the immediate supply/demand of commodities.

The futures market

In the futures market, commodities are traded for delivery at a pre-agreed time in the future and at a pre-agreed price. The bulk of commodity trading occurs in the futures market as companies prefer to plan ahead and mitigate the risk that a commodity’s price will deviate drastically from what they forecast at the time they need to buy or sell it. Most common futures contract pricing is for three months in the future. Other popular futures contracts have maturities of 1, 2, and 6 months. While you can also find contracts years ahead, these contracts have less liquidity.

Similar to cash markets, futures markets can also be affected by the same events, since due to the finite nature of raw materials and their complex supply chains, it can usually be expected that current economic events will also be felt in the future. Interestingly, futures markets have shown to be slightly more volatile due to the combination of longer time frames and the uncertainty these economic events bring to commodity prices. The use of leverage and speculative trading in futures trading also contributes to this volatility.