Cash Market vs Future Market - Top 6 Differences to Know | Espresso

Difference Between Cash Market and Future Market

Financial markets hold an important place in any economy. They refer to marketplaces wherein financial instruments, such as securities, currencies, commodities, and derivatives, are purchased and sold between investors.

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These financial markets are classified into two broad categories – cash market and future market – based on the time of delivery of financial instruments.

This article will discuss the differences between the cash market and the futures market. Let’s start with the definitions of both types of markets.

What is a Cash Market?

The cash market refers to the marketplace where securities or commodities are purchased or received in exchange for cash. The delivery of the underlying financial instruments takes place immediately after the transaction. There are two sections in the cash market – the equity market and the debt market.

The cash market is also known as the ‘spot market’ since the transfer of securities or assets takes place immediately, and the deal between the two parties involved (one buyer and one seller) is settled on the spot.

The transactions in this market are usually conducted in a regulated environment, such as stock exchanges, or through unregulated over-the-counter exchanges between the two parties.

What is the Future Market?

The future market refers to the marketplace where future agreements or contracts are purchased and sold between the two parties. In a future contract, one party agrees to buy a certain commodity or security on a pre-determined future date and at a pre-decided price. This date and price are agreed upon by both parties while making the contract.

The futures markets are regulated by the Securities and Exchange Board of India (SEBI) and the Forward Markets Commission (FMC). Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are two common exchanges that allow the sale and purchase of futures contracts in India.

Cash Market vs Future Market

Now that you know the definitions of the cash market and futures market let’s discuss the differences between these two based on some other parameters:

 

Cash Market

Future Market

Ownership

In the cash market, one who takes the delivery of the assets or securities can be regarded as their rightful owner.

In the case of the futures market, there is no option to take ownership of the underlying securities. One can only hold active positions, which have to be squared off before the end of the contract.

Delivery and deal settlement

The delivery of the securities is done immediately in the case of cash market transactions, and deal settlement between the two parties may take two to three days.

No actual delivery of the securities takes place in the case of future market transactions. All active positions are squared off before the end of the contract, and the deal settlement is done only after the contract expiry.

Payment

Full payment in the form of cash needs to be paid to complete cash market transactions.

A futures contract can be purchased only by paying margin money to the seller.

Lot size

There is no limit on the number of securities that can be sold or purchased through the cash market. The buyer can even buy a single piece of stock if they want.

There is no such facility in the future market. One has to buy securities as per their lot size.

Holding period

There is no bar on the period for which one can hold the securities purchased through the cash market.

In the case of a futures contract, the two parties have to mandatorily settle the contract before its expiry date.

Objective

Investors purchase securities through the cash market for making long-term investments.

Futures contracts are traded to gain through arbitrage and hedging of securities.

 

Conclusion

After knowing the difference between the cash market vs future market, you’re better placed to make informed investment decisions. There is a risk factor in both these markets, but the future market is riskier since it requires you to settle the contracts before a pre-determined date irrespective of the market position at that time.

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Frequently Asked Questions

Both cash market and future market have their pros and cons. The cash market is less risky than the future market. The future market is riskier but can provide very high returns. It’s prudent to know your knowledge, expertise, and risk appetite to determine which would be better for you.

Yes. You can simultaneously trade in both the cash market and the futures market. For example, you can take the delivery of stock and also purchase its future contract at a strike price. However, be aware of the risks involved before making such a move.

In such a case, the operator or seller of the contract may square it off at the prevailing market price and also ask for a penalty from you. Hence, it’s better to square off your future contract before its expiry without failing.