What Is a Cash Market?

A cash market is a marketplace in which the commodities or securities purchased are paid for and received at the point of sale. For example, a 澳洲幸运5官方开奖结果体彩网:stock exchange is a cash market 🍸because investors receive sh𒆙ares immediately in exchange for cash.

Cash markets are also known as 澳洲幸运5官方开奖结果体彩网:spot markets because their transactions are settled "on the spot." This can be contrasted with derivatives markets such as the 澳洲幸运5官方开奖结果体彩网:futures market, w🍃here buyers pay for the right to receive a good, such as a ba🍸rrel of oil, at a specified date in the future.

The cash market should not be confused with the 澳洲幸运5官方开奖结果体彩网:money market, which involves trading in cash equivalents (i.e., very short-term debt instrum❀ents) such as Treasuries and commercial paper.

Understanding Cash Markets

Cash markets can take place either on a regulated exchange, such as a stock market, or in relatively unregulated 澳洲幸运5官方开奖结果体彩网:over-the-counter (OTC) transactions. While regulated exchanges offer institutional protections that can protect against counterparty risks, OTC markets allow the parties involved to customize their contracts. Futures markets are conducted exclusively on exchanges, while 澳洲幸运5官方开奖结果体彩网:forward contracts—typically used in 澳洲幸运5官方开奖结果体彩网:foreign exchange (FX) transactions—are traded on OTC markets.

Sometimes, the line between cash markets and futures markets can get blurred. For example, stock exchanges like the 澳洲幸运5官方开奖结果体彩网:New York Stock Exchange (NYSE) are mostly cash markets, but they also facilitate the trading of 澳洲幸运5官方开奖结果体彩网:derivative products which are not settled on the spot. Therefore, depen🐲din♒g on the underlying assets being traded, the NYSE and other exchanges can also operate as a futures market.

Whether an investor chooses to transact on a cash market or a futures market will depend on their unique needs. For example, an industrial company that needs oil to fuel its production processes might purchase barrels of oil on a cash market and take physical delivery at the point of sale. By contrast, that same company might wish to hedge against the risk that oil prices will rise 🍌in the following years. To do so, it might purchase futures contracts for oil, in which case no physical barrels of oil would exc♍hange hands at the time of sale.

Spot Price

The current price of a financial instrument is called the 澳洲幸运5官方开奖结果体彩网:spot price. It is the price at which an instrument can be sold or bought immediately. Buyers and sellers create the spot price by posting their buy and sell orders. In liquid markets, the spot price may change by the second, as orders get filled and new ones enter the marketplace.

Special Considerations

Many commodities have active cash markets, where physical 澳洲幸运5官方开奖结果体彩网:spot commodities are bought and sold in real-time for cash. FX also has cash currencies markets, where the underlying currencies are physically exchanged following the settlement date. Delivery usually occurs within one day after execution. Stock markets can also be thoug🧔ht of as spot markets, with shares of companies changing hands in 🌠real-time.

In deciding between cash and derivatives markets, investors will also consider the costs of transacting in each marketplace. For most commodities, the cost of purchasing ღthat commodity in the spot market is lower thanꦦ its cost in the futures market. This is because there are costs associated with taking physical possession of the commodity, such as storage costs and insurance.

Example of a Cash Market

ABC Foods is a manufacturing company that uses wheat in se💛veral of its food products. Rather than cultivating wheat directly, ABC relies on the cash market to provide its wheat supplies. It purchases large amounts of wheat each month from farmers, paying for those goods in cash and stockpiling them in its warehouses.⛦

In addition to its cash-market purchases, ABC also uses forward contracts to secure the right to purchase wheat at predetermined prices in the future. In these situations, ABC does not take possession of the wheat at the point of sale. These transactions take place on an OTC basis between ABC and a specific counterparty, such as a f🦹ood broker or a specific wheat produc✃er.

Advantages and Disadvantages of Cash Markets

The cash market price is the current quote for immediate purchase, payment, and delivery of a particular commodity. This is incredibly important since prices in derivatives markets, such as for futures and options, will inevitably be based on these values.

Cash markets also tend to be incredibly liquid and ꧅active for this reason. Commodity producers and consumers will engage in the spot market and then hedge in the derivatives market.

A disadvantage of the cash market, however, is taking delivery of the physical commodity. If you buy spot pork bellies, you now own some live hogs. While a meat processing plant may desire this, a 澳洲幸运5官方开奖结果体彩网:speculator probably does not.

Another downside is that cash markets cannot be used effectively to hedge against the production or consumption of goods in the future, which is where derivatives markets are better suited.