Future Markets and cash markets are a part of the financial markets. Financial markets play a very crucial role in shaping the economy as they provide a means of saving for the investments made. Financial markets are often classified based on the time of delivery.

What is a Future Contract?

A future contract is an agreement to buy or sell a particular commodity at a specified date for a predetermined price.

Future contracts are also called “proxy instruments” and can be liquidated when a cash purchase or sale is completed.

Also Read: What is Intraday Margin Cash?

What is the Future Market?

A future market is a marketplace wherein an individual trades future contracts for commodities, stock indices, currency pairs, and interest rates at an agreed-upon price and at a pre-determined date. It, thus, helps in protecting investors and traders from losing money in any particular transaction even if the price of such a commodity or stock rises or falls later.

There are two main purposes of future markets:

  1. Price discovery: Here, buyers and sellers from all over the world interact with each other to determine prices.
  2. Risk of transfer price: -This particular concept gives buyers and sellers of commodities an opportunity to determine prices for future delivery. This entire price risk transfer process is called hedging.

For example, a wheat farmer has the risk of losing money if the price of wheat falls before harvest and sale. But with future markets, the farmer can minimize the risk by selling a wheat future contract that will eventually guarantee the farmer a predetermined price.

Also Read: What is Short Selling? – The Beginner’s Guide

What is a Cash Contract?

A sale on the stock exchange requires settlement in cash within a certain time on the day the contract is made.

What is a Cash Market?

A cash market is a marketplace wherein the commodities or securities purchased are paid for or received at the point of sale (POS), hereby making it a POS transaction. In simple words, the stock exchange is a cash market because here investors receive shares immediately in exchange for cash.

The cash market is also known as the spot market or physical market.

Main differences between Future Market and Cash Market:-

As we know that both the future and cash markets are different, here are a few differences between the two:-

BasisFuture MarketCash Market
OwnershipOne can never be a shareholder because the investor holds positional stocks which need to be traded at the end of the agreement.One can be a shareholder only till the investor holds the share
PaymentA small or token amount has to be paid while buying the trade.The whole amount has to be paid during the transaction date
SizeA specific amount or a pre-fixed lot size needs to be purchased in the future marketA transaction can also be done with the purchase of a single share.
PurposeSpeculation and Hedging riskBuying trades and shares in the market
TenureFor a specific time, i.e., till expiration, usually 3 monthsHold for a lifetime. Sometimes the stock can also be passed on to the future generations
DividendYou will never receive any dividendWill receive dividends as you become one of the shareholders of the company
RiskMore risk as you have to be ready to bear the lossLesser risk of loss as you can decide when to sell.
Regulatory BodySecurities & Exchange Board of India (SEBI) and Forwards Markets Commission (FMC)Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) or Commodity Exchange or Foreign Exchange Market
Research By, Trading Fuel

Also Read: Difference between Cash Markets and Future Markets

Conclusion:-

The Cash Market and the Future Market are both financial markets wherein the government, the general public, as well as companies, get a common place to trade in financial instruments. Both markets help you to yield returns at some point after trading, but with a risk factor attached. Both markets look similar as well, but they are different and appropriate in their own way.

About Us:-

Trading Fuel is our blogging website which provides you with enriched knowledge regarding finance and several trading tips. We put you up to date with our several other economic blogs that further help you with your investments. Stay tuned with us for more such interesting blogs and email us your queries.  

Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.