When examining the prices of investment instruments, we see that they are divided into spot market and free market. In the article, we explained what this distinction means.
Different mechanisms can be applied to determine the prices of instruments. That’s why we often see terms like spot and free-market price. Those who follow prices should know what they mean.
We see that the prices of the instruments differ according to the traded market. E.g; Spot and futures market prices are different from each other. Therefore, an accurate follow-up cannot be carried out without knowing what these markets mean.
Now let’s take a look at the two most common terms; spot and free market definitions.
What is Spot Market?
It is the market in which investment instruments change hands with instant buying and selling at the last price in the market. Spot Market is also called the cash market.
In the spot market, instruments are traded on the principle of immediate delivery. They change hands at the market price. Transactions can be made with instant payment and physical delivery, unlike futures markets.
E.g; Buying gold from the jeweler and dollars from the exchange office is a spot market transaction. Even buying a share from the stock market is an example of the spot market.
What determines prices in the spot market is the current supply and demand. It is seen that the transaction takes place at the latest 2 working days after the price determined at the time of the transaction.
The over-the-counter market is one such market. Here, transactions are made openly between the two parties. Markets with no rules, like the stock market. In addition, the terms of the contract are approved between the parties and may not be standard.
Spot markets; examples include forex, stock market, jeweler, and exchange office.
What is Free Market?
It is the type of market in which the prices of investment instruments are determined by mutual agreement between the buyer and the seller. As can be understood from this definition, the free market operates based on the supply and demand relationship.
A free market is one with little or no government intervention. In other words, buying, selling and price determination transactions take place in free competition.
In a free market, where prices occur outside the official exchange rate, there is constant competition. Therefore, monopoly does not occur. Good functioning of price mechanisms is of great importance for a healthy free market economy.
A free market economy is a type of economy in which economic activities are carried out freely for the conditions of perfect competition, and prices are determined and balanced by the market.
It cannot be said that there is no state intervention in such markets. For this reason, it is accepted that the state has a limited effect on the emergence of the equilibrium price in the market.
E.g; In cases that may harm the market, such as fraud, the state intervenes. Likewise, the existence of major economic crises, in which unemployment has increased significantly, also requires this intervention.
Within the scope of this information, the duty of the state in the free market is to contribute to the smooth functioning of the mechanism.
Finally, let’s make a definition for the free exchange rate that we often hear. It is also known as the floating exchange rate system. In other words, it is a system in which the exchange rate is determined according to the supply and demand in the market without government intervention.
Differences Between Spot Market and Free Market
If you take another look at the definition of both markets, you can easily understand the difference. The main difference between the spot and the free market is the price at which trades take place.
In the spot market, the price is determined at the time of the transaction. In the free market, the price determined according to the agreement between the buyer and the seller is taken as a basis.
The principles of prices, supply, and demand apply in both market structures. Of course, there are some differences in the application of this principle. In the spot market, there is instant supply and demand.
In the free market, there is a buyer and seller agreement within the framework of supply and demand, which is formed according to the conditions of perfect competition.
One of the differences is that there is no government intervention for the free market to function. However, there is no restriction on state intervention in spot markets.
