What is a Cash Market?
Financial transactions play a significant role in the economy since they aid in the distribution of individuals’ savings and investments. Investors create and exchange financial products such as commodities, stocks, currencies, and so on. Financial markets are frequently segmented based on when they are delivered.
Cash Markets
A cash market is a securities or commodity market where items are sold for cash and provided right away. In certain circumstances, the term “instant” refers to a period of one month or less. Forex markets, for instance, are assumed to a cash markets because investors can receive currencies in exchange for cash right away.
Since transactions take place “on the spot,” cash markets are also known as spot markets. In contrast, in a futures market, investors must acquire the right to receive a product or asset at a fixed future date.
Cash markets can exist on an authorized exchange, like a stock exchange, or in unauthorized OTC (over-the-counter) trades. While licensed exchanges provide institutional security measures against counterparty risk, over-the-counter marketplaces enable the parties to personalize their agreements. Futures markets are only sold on exchanges, whereas forward contracts, which are commonly used in FX (foreign exchange) transactions, are exchanged on over-the-counter (OTC) markets.
The distinction between cash and futures markets can become hazy at times. Stock exchanges such as NYSE (New York Stock Exchange), for instance, are primarily cash markets, but they also permit the trading of derivatives that are not resolved immediately. As a result, the New York Stock Exchange and other exchanges can act as a futures market based on the underlying assets.
The decision to trade on a cash market or a futures market is based on the investor’s specific needs. An industrial corporation, for instance, that requires oil to power its manufacturing operations, may buy barrels of oil on the open market and accept physical possession at the point of sale. That same corporation, on the other hand, could want to protect itself against rising oil costs in the coming years. It might do so by purchasing oil futures contracts, in which case no real barrels of oil would be exchanged at the moment of sale.
Key Concepts
Investors cannot utilize margin trading accounts because cash trading is done on the spot. It is thought to be less hazardous because an investor is less prone to losing more than their initial investment (like paying interest fees that might occur).
Cash trading, on the other hand, provides less leverage, which some may view as a disadvantage because the upside potential is limited. Before the date of settlement, investors must have the appropriate quantity of money in their accounts. Based on their broker, this might entail waiting several days before funds are ready to be accessed again.
SEE ALSO: What is a Basis Point?
