A spot commodity is a commodity that is traded by investors based on immediate payment. This usually means the commodity physically changes hands. It contrasts with a futures contract, which is based around the right to complete a deal and does not necessarily involve the payment being made. This distinction can affect both the prices and the way the deals are carried out.
In financial terms, commodities are any physical goods that are traded in large quantities. This is unlike securities or other financial products where the value derives from something else, such as an ownership stake in a company or the promise of future payments. Most commodities serve as raw ingredients in a manufacturing process.
The spot commodity market is simply the market for buying and selling commodities where the deal is completed immediately. In this case, somebody buying 500 barrels of oil on the oil market would literally pay their cash and receive the oil. In many cases, the physical delivery would be elsewhere, such as if a trader bought the oil on behalf of a gas station chain, but the principle is the same: it is a physical and literal purchase of the commodity.
The reason a spot commodity must be distinguished in such a way is that many commodity deals instead involve futures contracts. This is where what traders buy is actually a contract to buy or sell the commodity at a future date at an agreed price. The contract may change hands multiple times before this date, with the price of the contract varying. The buyers and sellers will effectively be gambling on how the price stated on the contract compares with the prevailing market price when it comes due, which will determine whether they can immediately resell the commodity at a profit. A variation on this is the options contract, where the buyer has the right to complete the deal on the agreed date at the agreed price, but is not obliged to do so.
One of the main differences between a spot commodity and a futures commodity is that futures commodities are assumed to be fungible. This means that every unit of the commodity is considered interchangeable, which for financial purposes involves the use of agreed international standards. This is because most buyers and sellers of futures commodities have little intention of ever taking delivery of the commodity and will simply resell it. With a spot commodity, the buyer will normally want to inspect the commodity on offer for quality, as they will be using it.
