by A contract is a legally binding agreement between two or more parties that creates enforceable rights and obligations. It is formed when an offer made by one party is accepted by another, supported by lawful consideration, and intended to create a legal relationship. Contracts can be written, oral, or implied, but certain types must be in writing as per law. Essential elements include free consent, lawful object, and capacity of parties. In the context of the stock and commodity market, contracts govern transactions, ensuring clarity, accountability, and dispute resolution between buyers and sellers, thereby facilitating smooth and fair market operations.
Types of Contracts:
- Delivery Contracts:
Delivery Contract is a type of agreement in which the seller commits to delivering a specific quantity and quality of goods, commodities, or financial instruments to the buyer on a predetermined future date at an agreed price. Such contracts are common in both commodity and stock markets, ensuring that the buyer receives the asset physically or in dematerialized form, depending on the market rules. Delivery contracts help reduce uncertainty for both parties by locking in the transaction terms, protecting them from price fluctuations and ensuring timely execution of obligations.
In commodity markets, delivery contracts are especially important for agricultural produce, metals, or energy products where actual delivery is expected. In stock markets, they are mainly relevant in the settlement of equity trades in the cash segment. These contracts require compliance with settlement cycles, quality standards, and location specifications as per exchange rules. They play a vital role in maintaining trust, reducing counterparty risk, and promoting transparency in trade. While they can provide stability, they also require careful planning for logistics, financing, and storage. Failure to meet delivery obligations can lead to penalties, reputational damage, and even legal disputes, making adherence crucial for smooth market functioning.
- Non-Delivery Contracts:
A non-delivery contract is a type of agreement in which the settlement of a trade takes place without the actual physical delivery of the underlying asset. Instead, the transaction is settled in cash based on the difference between the contract price and the market price at the time of settlement. These contracts are common in derivatives trading, such as futures and options, where the primary intention is not to own the asset but to profit from price movements or hedge against potential risks. Non-delivery contracts offer flexibility, faster settlement, and reduced logistical requirements since there is no need to arrange for transportation, storage, or quality verification.
In the stock and commodity markets, non-delivery contracts are widely used by traders, speculators, and hedgers to manage price volatility without involving the complexities of actual delivery. For example, in commodity futures, traders often close out positions before expiry, resulting in cash settlement rather than delivery. These contracts allow participants to benefit from market trends without large capital investments or physical handling of goods. However, they also carry higher speculative risk and can lead to significant losses if market movements are unfavorable. Proper risk management, market knowledge, and timely decision-making are essential when dealing with non-delivery contracts.
Types of Markets:
- Cash Market:
The cash market, also known as the spot market, is a segment of the financial market where financial instruments such as stocks, commodities, and currencies are bought and sold for immediate delivery and payment. In this market, transactions are settled “on the spot” or within a short settlement period, usually T+1 or T+2 days in India. The buyer makes full payment, and the seller delivers the asset, making it a straightforward trading process compared to derivatives. Prices in the cash market are determined by real-time supply and demand, reflecting the current value of the asset.
In India, the cash market plays a crucial role in capital formation and liquidity creation. Stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) facilitate cash market transactions for equity shares, bonds, and other instruments. Similarly, commodities such as gold, silver, and agricultural produce can be traded in the cash market. Investors in the cash market typically aim for ownership of the asset, either for long-term investment or short-term trading. Since payment and delivery are immediate, this market is considered less speculative compared to the derivatives market, though it still carries risks related to market volatility and price fluctuations.
- Derivatives Market:
The derivatives market is a segment of the financial market where participants trade financial contracts whose value is derived from the price of an underlying asset, such as stocks, bonds, commodities, currencies, interest rates, or market indices. These contracts do not involve the actual exchange of the underlying asset at the time of the agreement; instead, they are settled at a future date as per the contract terms. Common derivative instruments include futures, options, forwards, and swaps. The derivatives market serves multiple purposes, such as hedging against price risks, speculating for profit, and arbitrage opportunities.
In India, the derivatives market has grown significantly since its introduction in 2000, with the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) offering various derivative products. Equity derivatives, currency derivatives, and commodity derivatives are widely traded. This market allows investors to manage risks by locking in prices or earning profits from market movements without holding the actual asset. However, it can also be highly speculative, leading to large gains or losses. Regulatory bodies like the Securities and Exchange Board of India (SEBI) oversee derivative trading to ensure transparency, reduce systemic risks, and protect investors while maintaining market efficiency and integrity.
