spot price vs future price

Spot Price vs. Future Price: What’s the Difference?

There is nothing in this world that humans can’t consume or buy and sell. The buyable commodities can be in the form of currency, stock, energy sources, materials, and even food and fabric.

Everything that is a commodity, be it natural, manufactured, fabric, energy forms, or metals, has a price: the spot price and the future price. How can a single commodity have two prices? It merely depends on the time you are purchasing the commodity. Let’s learn more about the two types of commodity prices, their differences, and how they work in the stock market.

What Is The Spot Price Of A Commodity?

The spot price is the current market price of a specific commodity in the cash market, also known as the spot market. It’s the price of that particular commodity at its present value. The spot price of goods means that those items are ready for sale and purchase and delivered immediately. The term “spot price” got its name because of the commodity’s spot purchase, payment, and delivery.

What Is The Future Price Of A Commodity?

The future price is the price of that same commodity at a future date, depending on various factors. It is the price you must pay today to receive the right to buy or purchase that good in the future.

This transaction can be next month, next quarter, or even next year. For example, the current price of petrol is Rs 100 per litre. But its future price may increase or decrease. This future price depends on the period of holding the commodity, supply, and demand in the future markets.

The Difference Between The Spot Price And The Future Price

Knowing a particular commodity’s spot and future prices helps in commodity trading, stocking goods for future sales, stock investment, and investment in certain commodities. These commodities may turn into assets or liabilities in the future.

The difference between spot and future prices you pay today is known as the “basis”. This difference occurs due to the “cost of carrying” the commodity. The cost of carrying is attached to various factors influencing the future price.

This is due to holding the commodity for a specific period. This holding results in other costs such as inventory, insurance, interest, and other factors.

Generally, any commodity’s basis is positive, known as “contango”. If the future market prices of certain commodities are higher than the current market prices, it is known as “contango.”

When the future price of a particular commodity gets lower than the spot price, it is known as “Backwardation”. This situation occurs when the demand is lower and the supply of the commodity is excellent.

Bottom Line

The spot and futures prices help traders and investors buy and sell particular commodities and make stock investments. The spot price and the future price of a commodity depend on various factors, including the commodity’s supply and demand, inventory, and other factors.

Disclaimer: This article is not investment advice. Trading and investing in the securities market carries risk. Please do your due diligence or consult a trained financial professional before investing.

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