Differences between Physical & Future Market, options on commodities exchanges

In an economy, financial transactions hold an important place as it helps in assigning people’s savings and investments. Financial instruments like commodities, securities, currencies, etc. are made and traded by investors in the market. Financial markets are often classified depending on the time of delivery.

Cash Market

Also known as the spot market, securities and commodities like shares and bonds of precious metals, agricultural produce, etc. are traded for immediate delivery. There are 2 sections in this market; debt and equities. The deal between the concerned parties is settled by T+2 or 3 days to the date when the trade happened. The cash market is regulated by SEBI. One can trade in the cash market through Bombay Stock Exchange, National Stock Exchange, Commodity Exchange or a Foreign Exchange Market. It’s a place where the buying and selling of commodities are mutual and is undertaken by government, the general public, other companies, etc.

Future Market

This refers to the market where future contracts are traded at an agreed date and price in the future. In the contract between the parties, one party decides to buy a certain commodity at an agreed price. This has to be delivered on a specific date mentioned by both the parties. The regulators for the future market are Securities Exchange Board of India and Forward Markets Commission. The future market exchanges in India are BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).

Difference

Ownership: In the cash market, one remains the shareholder of the company as long as he/she holds the shares. Whereas, in the future market, one can never become a shareholder as he/she just holds positional stocks which have to be traded at the end of the agreement.

Payment: In the cash market, at the time of buying shares, the whole amount has to be paid. While initiating the future market trade, only a small amount of money has to be paid.

Size: A single share of the company can be brought in the cash market. A pre-defined amount or size has to be brought in case of the future market.

Tenure: You can hold the stock for a lifetime in the cash market. Sometimes the stocks can also be passed on or transferred to the future generations. In the future market, you can only hold it for a pre-determined period of time, i.e. the expiration, which usually means 3 months.

Dividends: You’ll receive dividends on the cash market stock as a shareholder of the company. In the case of future market stocks, you’ll not receive any dividend. This also stands true for other benefits like bonus, shares, etc.

Risk: There is a risk factor in both these markets, but it could be higher in the future market as you have to settle the contract in a specific time and also note down the losses. With cash market stocks, you can decide to sell it at your convenience or when it reaches a higher price.