Cash market definition
A cash market is a marketplace where securities are immediately paid for and delivered at the point of sale. For example, a stock exchange is classed as a cash market – because investors receive their shares as soon as they have paid for them.
Cash markets are also called spot markets, because the transactions get settled on the spot. They differ from futures markets, where buyers pay for the right to receive goods at a specific future date.
Cash market transactions may take place on exchanges like stock markets or via over-the-counter (OTC) methods.
Regulated exchanges offer institutional and structured protection against counterparty risks. OTC markets, on the other hand, allow the parties involved to customise their contracts.
What is the difference between cash and futures markets?
A cash market is where financial instruments get traded and where, for example, the delivery of stock/shares occurs. The total amount of the transaction value must be paid in cash when buying the shares.
In contrast, a futures market is where only futures contracts are bought and sold on agreed dates in the future and at predefined prices.
Trading in futures doesn’t involve owning shares, and no delivery occurs as the contract expires on the expiration date.
Traders can trade on margin with futures, and they don’t have to pay cash at the point of sale. With futures contracts, settlement takes place on a contract’s expiration date.
Futures contracts don’t have dividend pay-outs, and they’re used more for hedging, speculation or arbitrage purposes, unlike buying shares for investment reasons.