What commodities are and how they trade
Spot vs futures: two ways to price a commodity
3 min
There are two distinct prices for almost every commodity, and confusing them is a classic beginner mistake.
The spot price
The spot price is the price for buying or selling the physical commodity right now, for immediate delivery. When the news says oil is at US$80, that is usually the spot (or near-month) price. Spot is where physical buyers — a refinery, a food processor, a jewellery maker — actually transact.
The futures price
A futures contract is an agreement to buy or sell a set quantity of a commodity at a fixed price on a specific future date. The futures price reflects what the market expects, plus the cost of holding the commodity until delivery (storage, insurance, financing) minus any benefit of holding it.
Most commodity trading happens in futures, not spot, because:
- Futures are standardized and trade on exchanges, so they are liquid and transparent.
- A producer can lock in a selling price months ahead; a consumer can lock in a buying cost.
- Speculators can take a view with far less capital than buying the physical good.
Why this matters to you
As a retail investor you will almost never touch the spot market — you cannot store a tanker of crude or a silo of soybeans. Your exposure comes through futures, ETFs or the shares of producing companies, all of which are priced off the futures curve. Keep the spot/futures distinction in mind every time you read a commodity quote.
This content is for educational and informational purposes only and is not investment, financial, tax or legal advice. Trading and investing carry risk, including the possible loss of capital. Any performance shown by third-party tools is hypothetical and not a promise of future results. Do your own research and consider professional advice before making any decision.