Cash Market Trading 101
Cash markets, also known as spot markets, are financial markets where securities, commodities, and currencies are bought and sold for cash and delivered on the spot. These markets differ from futures markets, where the delivery of the underlying asset takes place at a later date. In this article, we will delve into the definition of how cash markets work, compare cash vs futures trading, and provide examples of cash market trading.
Definition Of Cash Market
A cash market is a market where financial instruments such as stocks, bonds, commodities, and currencies are bought and sold for cash and delivered immediately. In contrast to futures markets, cash market transactions are settled on the spot, and the buyer takes possession of the underlying asset immediately. Cash markets are also known as spot markets, and they are the most basic form of securities trading.
How Cash Market Trading Works
In a cash market, buyers and sellers come together to negotiate the price at which they will buy or sell an asset. The price is determined by supply and demand, and it is usually influenced by various factors such as economic conditions, political developments, and even natural disasters. Once a buyer and seller agree on a price, the transaction is completed, and the underlying asset is delivered to the buyer.
The most significant difference between cash vs futures markets is that cash market transactions are settled on the spot, while futures market transactions are settled at a later date. In cash markets, the buyer takes possession of the underlying asset immediately, while in futures markets, the buyer agrees to take possession of the underlying asset at a later date.
Examples Of Cash Market Trading
- The stock market is an example of a cash market. When an individual buys a stock, they take possession of the shares immediately, and the transaction is settled on the spot.
- The commodity market is another example of a cash market. When an individual buys a commodity such as gold, they take possession of the gold immediately, and the transaction is settled on the spot.
- The foreign exchange market is yet another example of a cash market. When an individual buys a currency, they take possession of the currency immediately, and the transaction is settled on the spot.
In conclusion, cash markets, also known as spot markets, are financial markets where securities, commodities, and currencies are bought and sold for cash and delivered on the spot. Cash markets are the most basic form of securities trading and differ from futures markets, where the delivery of the underlying asset takes place at a later date. Understanding the definition, how it works, and examples of cash markets can help investors make informed decisions when trading in these markets.
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