Spot Transactions Explained

A spot transaction may sound like it has something to do with polka dots, but in fact it refers to the market for immediate currency trades.

There is no formal place or environment in which this market can be said to have a market place, but rather it takes place through the phone and internet.

The way that the spot market works is to offer a buy and sell or bid ask price that is a spread. For instance, you might have a dollar/pound spot rate of 1.925 to 1.935, say.

How does this work? Well, the bid price refers to the price at which the bank or institution holding the currency is willing to buy your currency at. In this case, it is saying that's the price it is willing to buy the pound sterling at from you.

The second price in the spread is the ask price, and that is the price at which it will sell sterling to the customer.

Now the key to remember is that the bank or institution will always offer you the worst of the two rates for you... so that's the way to remember which is which with regard bid and ask prices.

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