Important Differences Between Cash Market and Future Market

Cash Market

The Cash Market, also known as the Spot Market or Physical Market, is a financial market where financial instruments such as commodities, currencies, and securities are traded for immediate delivery and payment. In a cash market, the transaction is settled immediately, usually within two business days, as opposed to a futures market, where the delivery and payment are made at a later date.

The Cash Market is considered to be the most liquid financial market, as participants can trade large volumes of financial instruments with ease and low transaction costs. Additionally, prices in the Cash Market are often more transparent and reliable than prices in other financial markets, as they reflect the most up-to-date supply and demand conditions.

Investors and traders participate in the Cash Market for a variety of reasons, including to manage risk, make investments, and generate returns. For example, a company might use the Cash Market to hedge against price movements in the underlying commodity, such as oil or gold, by purchasing or selling a futures contract.

The Cash Market is an important part of the financial system, as it provides liquidity to other financial markets, such as the futures and options markets, and helps to ensure that prices are transparent and accurate.

Overall, the Cash Market provides investors and traders with an efficient and effective way to trade financial instruments for immediate delivery and payment, allowing them to manage risk, make investments, and generate returns.

Purchasing in the Cash Market

In the Cash Market, purchasing is a straightforward process. Participants can purchase financial instruments directly from a seller, either through an exchange or through a broker. The price of the financial instrument is determined by supply and demand, and the transaction is settled immediately upon completion.

Laws in the Cash Market:

The Cash Market is subject to various laws and regulations, which vary depending on the jurisdiction and the type of financial instrument being traded. For example, the Commodity Futures Trading Commission (CFTC) oversees the trading of commodities in the Cash Market in the United States, while the Securities and Exchange Commission (SEC) regulates the trading of securities. The laws and regulations are designed to ensure fair and transparent trading practices, protect investors, and maintain market stability.

In India, the Cash Market is regulated by various governmental agencies, including the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Ministry of Consumer Affairs. The laws and regulations governing the Cash Market in India are designed to protect investors, maintain market stability, and ensure fair and transparent trading practices.

For example, SEBI regulates the trading of securities in the Cash Market, including equities, bonds, and derivatives. The regulations include rules for market access, trade execution, and settlement, and are designed to protect investors and maintain the integrity of the market.

The RBI regulates the trading of currencies in the Cash Market, including the Indian Rupee and other major world currencies. The regulations include rules for foreign exchange transactions, which are designed to maintain the stability of the Indian financial system and protect against currency market manipulations.

The Ministry of Consumer Affairs regulates the trading of commodities in the Cash Market, including agricultural commodities, precious metals, and energy products. The regulations include rules for market access, trade execution, and settlement, and are designed to ensure fair pricing and protect consumers.

Overall, the laws and regulations governing the Cash Market in India are designed to ensure that the market operates in a transparent, fair, and stable manner, and to protect investors and other market participants.

Types of financial instruments in the Cash Market:

A wide range of financial instruments are traded in the Cash Market, including commodities (such as oil, gold, and agricultural products), currencies, and securities (such as stocks and bonds). The type of financial instrument being traded will determine the specific laws and regulations that apply.

Users of the Cash Market:

The Cash Market is used by a variety of participants, including individuals, institutions, and companies. Individuals may participate in the Cash Market for speculative purposes or to manage their portfolios, while institutions such as banks, hedge funds, and pension funds participate to manage their investment portfolios and hedge against risks. Companies may participate in the Cash Market to hedge against price movements in underlying commodities or to purchase or sell currencies.

Future Market

A futures market is a type of financial market where participants can buy and sell contracts for future delivery of a specific asset, such as a commodity, currency, or security. Unlike the Cash Market, where transactions are settled immediately, futures contracts are settled at a future date.

Futures contracts are standardized, meaning that they have specific terms, such as the type of asset, the delivery date, the quantity of the asset to be delivered, and the price at which the contract will be settled. This standardization allows for efficient pricing and reduces the costs of transactions.

The main difference between the Cash Market and the Futures Market is that in the latter, participants are not buying or selling the actual underlying asset, but instead are entering into a contract to either buy or sell the asset at a future date. This allows participants to manage risk and make investments without actually having to purchase or sell the underlying asset.

Futures markets are used by a variety of participants, including individuals, institutions, and companies. For example, farmers may use the futures market to sell their crops in advance, before they are actually harvested, while investors may use the futures market to hedge against changes in the price of an underlying asset or to speculate on price movements.

The futures market is regulated by various governmental agencies, such as the Commodity Futures Trading Commission (CFTC) in the United States and the Securities and Exchange Board of India (SEBI) in India. The regulations are designed to ensure fair and transparent trading practices, protect investors, and maintain market stability.

In India, the Futures Market is regulated by the Securities and Exchange Board of India (SEBI), which is the primary regulatory body for the securities market in India. The main objective of SEBI is to ensure the protection of the interests of investors and to promote the development of the securities market in India.

In the Futures Market in India, participants can trade futures contracts for a variety of assets, including commodities, currencies, and securities. Futures contracts are standardized and traded on organized exchanges, such as the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX).

Futures contracts can be used by a variety of participants, including individuals, institutions, and companies, for a variety of purposes, including hedging against price risk, speculating on price movements, and managing investment portfolios.

In terms of the laws governing the Futures Market in India, SEBI has implemented a number of regulations to ensure fair and transparent trading practices, protect investors, and maintain market stability. For example, SEBI regulates the trading of futures contracts, including the rules for market access, trade execution, and settlement. SEBI also regulates the trading of securities in the Futures Market, including the rules for market access, trade execution, and settlement, and the rules for margin requirements and risk management.

The Futures Market in India provides a platform for participants to trade futures contracts for a variety of assets, including commodities, currencies, and securities. It operates under the regulation of the Securities and Exchange Board of India (SEBI), which is designed to ensure fair and transparent trading practices, protect investors, and maintain market stability.

Cash Market and Future Market instrument valuation

The valuation of instruments in the Cash Market and the Future Market are done differently due to the differences in the nature of the contracts traded in each market.

In the Cash Market, instrument valuation is based on the current market price of the asset, which is determined by supply and demand dynamics. The price of the asset can change quickly and frequently, reflecting the real-time supply and demand conditions of the market.

In the Future Market, instrument valuation is based on the predetermined futures price, which is set when the futures contract is signed. The futures price is established based on supply and demand dynamics, but it remains fixed for the duration of the contract.

Additionally, in the Future Market, the value of a futures contract can be influenced by factors such as interest rates, time decay, and changes in market conditions. These factors can impact the price of the underlying asset and, in turn, the value of the futures contract.

It’s important to note that in the Future Market, the value of a futures contract is also influenced by the margin requirement. This means that investors must maintain a certain level of collateral in their account to cover any potential losses that may arise from changes in the market.

Important Differences Between Cash Market and Future Market

Key Differences Between Cash Market and Future Market

Here are some of the key differences between the Cash Market and the Future Market:

• Definition: The Cash Market is a market where assets are traded for cash and settled immediately, while the Future Market is a market where participants trade futures contracts for a variety of assets, including commodities, currencies, and securities.
• Nature of Contracts: The Cash Market involves spot contracts, which are contracts for immediate delivery and consumption, while the Future Market involves futures contracts, which are standardized contracts for delivery at a later date.
• Delivery: In the Cash Market, delivery of the asset is immediate, while in the Future Market, delivery is deferred to a future date.
• Price Discovery: In the Cash Market, price discovery is done in real-time, based on supply and demand dynamics. In the Future Market, price discovery is done based on predetermined futures prices, which are set when the futures contract is signed.
• Risk: The Cash Market is considered to be riskier than the Future Market, as the price of the asset can fluctuate greatly in the short term. In the Future Market, risk is lower as the price of the asset is predetermined and the futures contract provides some degree of price stability.
• Liquidity: The Cash Market is generally more liquid than the Future Market, as there is a high demand for immediate delivery of assets. The liquidity in the Future Market can vary depending on the demand for the particular futures contract being traded.
• Regulating Authority: The Cash Market is regulated by various exchanges and government bodies, while the Future Market is regulated by the Securities and Exchange Board of India (SEBI).
• Purpose: The Cash Market is typically used for immediate delivery and consumption of assets, while the Future Market is used for hedging against price risk, speculating on price movements, and managing investment portfolios.