The spot market is an important aspect of all markets including the Foreign Exchange Market. In essence, the spot market is where investments are resolved immediately or on the spot. This means that when an investor buys or invests in a currency on the Foreign Exchange Market, they pay the price at that time at that moment. Basically you are buying at the current market value. This can potentially save or cost you money depending on what the market does in the future, but what it does guarantee for you is the present.
The spot market is also known as the cash market or the physical market because it is immediate and has a much faster pace as opposed to forward markets which cover price changes at future dates as opposed to current prices. Depending on the type of good or currency, investing in the spot market can be important. If you expect it to rise in the future then buying it at the current market value can be a positive investment, whereas if you expect it to fall in the future it could be advantageous to put off that purchase into the futures market when you might get a better deal.
The reason the spot market is often called the cash market is because it is far more akin to going into a store and buying a product than other types of investment that are possible on the Foreign Exchange. In essence, you are literally buying a product at that particular moment in time as opposed to speculation about the future of that commodity or currency.
Both the stock market and the Foreign Exchange Market have these instant by-practices; however, for small investors and individuals they likely will have to go through a brokerage firm or have their own broker. Because the Foreign Exchange Market is a critically important economic infrastructure and trading platform it requires a brokerage license or a firm that is licensed to be able to buy and sell on the exchange. These brokerage individuals will buy and sell on your behalf, and many times the process is partially automated with online buying and selling.
The biggest influencing factors on the spot market are supply and demand. The futures market deals in speculation on where things may go, whereas the spot market deals with supply and demand to determine current market value prices. This is why when the United States government announces things like “quantitative easing”, in essence printing more money and adding it into the economy, this can cause a change in the spot market price of the US Dollar on the foreign exchange markets.
Things like changing interest rates, improving economies, economic crashes, and the Treasury Department simply printing more money when the value itself has not increased can cause different levels or types of inflation which change the spot market value price of the dollar. Buying at the spot market price can thus protect your investment from future devaluation by trading in a foreign currency before your own suffers from inflation or devaluation.