In the most basic sense, a spot exchange rate is the price you pay for a currency, for delivery on the spot, or in other words, immediately (maximum of 2 days). If you go to any dealer and ask him to exchange pounds to USD, he will quote you the spot price.
A forward exchange rate is the price you would need to pay for a currency, with delivery at some specified time in the future. For example, if you are planning to purchase some goods from the USA in 3 months, and are unsure what the cost of buying USD would be at that time, you can fix the price today by entering into a transaction in the forward market. While the price would be fixed today, the actual transaction would take place in the future, at either a specified date, or within a range of dates.
While a spot transaction can be completed through any currency dealer, forwards are done through only banks and specialised dealers. A deposit (usually 10-15% of the transaction size) is required when entering a forward contract.
While the spot rate is based on the current demand and supply of currency in the market, the forward rate is often slightly higher or lower than the spot rate. For example, £10,000 may convert to $12,500 in the spot market today, but only $12,000 in a forward transaction to be completed 6 months from now. This is because the forward rate is based on future expectations, and depends on what the market forecasts the price of the currency to be at the given date. So if your broker thinks the price will decline, they will offer you a lower price than the spot rate.
If you want to send your family in India £1,000, or are making a sudden trip to the USA, the spot market is the right place for you. It is convenient, with many dealers available to choose from, allowing you to get the best rate. If however, you need to make a large payment, such as for the purchase of equipment from China, or buying property in the USA, forwards are a good way to limit your risk and lock in the cost you will have to incur, saving you from any unexpected changes to the cost.