The smell of breakfast bacon triggers something in your brain. Suddenly, you must have 40,000 pounds of pork bellies. But trading for this commodity on the commodities market is going to take too much brainpower this early in the morning and will take months too long. Enter the spot market, where you can get your pork today at a price that's based on that day's supply and demand.
The commodities futures market, on the other hand, involves buying contracts for commodities like pork, wheat, gold, and oil at prices you think they will be in the future, and then hoping the prices go up or down in your favor. Delivery comes at specified times, and lots of commodity traders trade the goods, but have no intention of ever taking possession.
Spot prices higher than futures prices can come about because of tight supply and buyers' increased demand -- now -- for a product that seems scarce. The difference between spot price and futures price can also present an opportunity to profit through arbitrage.
Related Fool Articles
Recent Mentions on Fool.com
- This 149-Bagger Hedge Fund Bought Google Inc. Should You?
- Britain's Biggest Grocer Takes One on the Chin
- Why Royal Gold, Inc Stock Has Skyrocketed 67% in 2014
- 5 Things Union Pacific Corporation's Management Wants You to Know
- Gen Con: An Investor's-Eye View of "The Best Four Days in Gaming"
- 3 Reasons SodaStream International Ltd.?s Stock Could Rise