Difference between Cash Market and Future Market
Last Updated :
01 Mar, 2024
Financial Markets can be defined as markets wherein financial instruments like securities, currencies, commodities, etc. are created and traded between two ends (buyers and sellers). Financial Markets can be classified into various types on the basis of nature, claim, time, structure, etc. On the basis of Time of Delivery, Cash Market and Future Market are two of the types of Financial Markets. A Cash Market can be understood as a market where payment is done and ownership is transferred to the buyer in real time whereas in a Future Market ownership is transferred on a specific date in the future against payment done today.
What is Cash Market ?
Cash Markets are the markets where transactions take place on an immediate basis. Purchase, sale, and transfer of ownership of financial commodities occur as and when potential buyers pay for them. Cash Markets are also known as Spot Markets because transactions are settled on the spot. Transactions are settled in real-time, usually within 2-3 business days. As cash market transactions are settled on an immediate basis, it provides the advantage of liquidity to investors. Liquidity provides greater flexibility and the ability to capitalize on short-term opportunities. For example Stock Exchange, over-the-counter transactions, etc.
What is Future Market ?
Future Markets are the markets where the buyer agrees to receive delivery on a specific future date against some pre-determined payment made today. Future markets are also known as Forward markets. For example The New York Mercantile Exchange, The Chicago Board of Trade, etc. Future markets are generally fulfilling the purpose of hedging risk so that buyers and sellers will not have to deal with the rising/ falling of prices in the future. Under future markets, transactions do not provide any kind of advantage related to liquidity because transactions are settled on a predetermined future date.
Differences between Cash Market and Future Market
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Basis
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Cash Market
|
Future Market
|
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Meaning
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Purchase, Sale, and delivery of financial commodities happen on the spot purchase. |
Purchase and sale of financial commodities occur against a predetermined future date of delivery. |
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Alternate Name
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Spot Markets |
Forward Markets |
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Examples
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Stock Exchange, Over-the-counter |
The New York Mercantile Exchange, The Chicago Board of Trade |
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Time Horizon
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Normally delivery takes 2 or 3 days after the Trade Day. |
At a specific future date |
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Purposes
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Selling and buying of shares and other financial commodities. |
Hedging risk and price discovery |
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Payment
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The full amount needs to be paid at the time of transaction. |
Only margin money requires to be paid in order to initiate the transaction |
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Holding Period
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Financial commodities can be held for life. |
Contracts have to be settled on or before the expiration period. |
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Lot Size
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A person can buy even a single share. |
One has to buy shares according to the minimum lot size defined. |
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Dividends
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When you buy shares under Cash Market, you are entitled to receive dividends. |
You are not entitled to receive any dividends under future contracts. |
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