What is the Cash Market?
Definition of Cash Market Definition: This market is also commonly known as Spot Market. In this market the transaction are completed in a prompt manner which means that the ownership of an item or currency is transported from the seller to the purchaser and payment is not offered until the currency or commodity is delivered. This particular market differs with the other market known as the Futures Market. In this sort of market, the contracts are finished within a particular time period in the future. As far as a cash market is concerned, the purchasers make a payment of the market cost for the currencies, commodities or cost on the mark just like one would make payments for the gas, groceries and other products.
What comes to your mind when you hear about cash market? When making any purchase, the contract can be fulfilled either immediately or at a later date. For example, bonds and stocks require that the contract is fulfilled at a later date. They are classified as contracts for a future market. However, a product exchanged for money and within a span of two days, can be considered to be part of the cash market. A cash market is a market or marketplace for the immediate settlement of transactions. These could be commodities or securities. It is also called a spot market since the transactions involved occur on the spot. They can operate anywhere as long as the infrastructure exists for the conduct of the transaction. They can occur over-the-counter or through an exchange.
Cash Market Instruments
These are the items you can make good of when making cash markets purchase. They include:
• Stocks; and
• Electronic traded funds (ETFs)
Cash Markets V/s Futures Markets
As regards transactions that can be concluded in the future, they are referred to as futures markets. In this case, the contract gives the buyer the obligation to purchase an asset at a price set at a point in the future. It also gives the seller the obligation to sell such asset at a price set at that point in the future. Stocks and bonds are the best examples of futures markets that are widely transacted. The price will be set by the laws of supply and demand at that particular point in the future.
Differences between Futures and Cash Markets
The difference between futures markets and cash or spot markets is the time spread involved in each of them. This time spread is important as it indicates the expectation of the markets, regarding prices in the future. Both cash and futures markets depend on the laws of supply and demand. Futures markets are also dependent on the expectation of future prices, weather conditions with regards to perishable products, storage costs, as well as other related factors. For example, the price of one tomato could be $1 today. But in some months to come, during seasons that cannot accommodate enough production of tomatoes from the farms, the price is expected to go higher. This is because there will be too much demand and low supply of the commodity, in addition to the weather condition that is not accommodative.
To fix the supply-demand gap, consumers might have to import, at extra costs, making futures unpredictable. The reverse in this example is also true. If the prices are high right now due to varying factors, when the conditions become accommodating, the price of one tomato should go down. Cash markets on the other hand operate on a +2 or 3 day trade period.
Another difference between these two types of markets is the regulator. Generally, a cash market is the actual exchange of an item or stock, over-the-counter. The regulation of futures markets is only made by an exchange. Such an exchange is subject to time as it will only happen when the specified time elapses.
Ownership of the item being traded changes immediately the exchange is done when it comes to the cash market. In the futures markets, ownership does not change until the agreement is completed. As regards the risks, it is a bit higher for future markets as compared to cash markets. However, the reward is also higher for futures. With cash markets, you can only sell an item you purchased at your convenience, or when the price goes higher. Cash markets also provide for holding the item for as long as you want. Shares bought for futures markets can only have a contract of a maximum of three months. Shares bought in cash are trans-generational.
When it comes to trading commodities, futures are the best. This is because of some reasons, including seasons, less financial exposure and pure play. For a trader who expects an upcoming season to bring about the shortage of a commodity, they will be able to leverage profits over the market. There is less financial exposure as you can purchase a huge quantity of a product, without subjecting yourself to a large cash portion. Pure play refers to the fact that with a commodity, you will have an actual product, versus owning a stock, which mirrors the derivative. The reaction between a stock traded on the spot, is different to trading a commodity, traded in the future.
These are financial instruments, where the price or value of one commodity is dependent on the price or value of another. It is closely associated with futures markets, but each has its own uniqueness. Cash markets operate on the immediate, irrespective of the price; futures markets rely on the price of a commodity in the future; whereas derivatives involve the price of one depending on another.
Cash Markets Vs Derivatives
Derivatives apply quite similarly to the futures. The ownership changes immediately for a cash market while that of a derivative has to wait because the product is depending on another. Holding a product in a derivatives market poses a bigger risk as compared to holding one after a cash market sale. Also, you can hold a purchase made in cash for as long as you can. For one in a derivatives situation, you will have to hold it until the prices become higher. In a derivatives market, you can buy in bulk, but for the cash markets, you can only buy shares. Also, for the cash markets, you have to pay the full amount, whereas in a derivatives market, just like in futures market, you will only make partial payment instead of the full amount.