Difference Between Cash Market and Derivative Market
- 28 Mar 2024
- By: BlinkX Research Team
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Financial markets are those in which two sides (buyers and sellers) exchange financial instruments such as securities, currencies, commodities, etc. Different types of financial markets may be distinguished based on factors such as nature, claim, time, structure, etc. Financial markets may be divided into two categories; derivative markets and cash markets, depending on the kinds of products that are exchanged there. While the derivative market trades contracts, the cash market trades assets. In this article let’s understand What is Cash Markets and Derivatives Markets.
What is the Cash market?
Cash markets are marketplaces where assets are traded, and transactions occur in real-time. Financial commodities are purchased, sold, and transferred ownership as potential purchasers pay for them. Because transactions are completed on the spot, cash markets are also known as spot markets. Transactions are finalised in real time, often within two to three business days. Investors benefit from liquidity because cash market transactions are completed rapidly. Liquidity gives you more flexibility and the capacity to take advantage of short-term opportunities. For instance, the Stock Exchange, over-the-counter trades, and so forth.
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Table of Content
- What is the Cash market?
- What is a Derivative Market?
- Difference Between Cash Market and Derivative Market
- Participants of the Derivatives Market
- Advantages of the Derivatives Market
- Disadvantages of the Derivatives Market
- Points to be Aware of While Using Derivatives
What is a Derivative Market?
Derivative Markets are exchanges where derivatives such as futures and options are exchanged. Trading derivatives such as options contracts and futures exchanges aid in risk management, speculation, and profit maximisation. Investors tend to invest more because the return on investing in derivative markets is greater than the risk. There are two types of derivative markets: exchange-traded derivatives and over-the-counter (OTC).
Difference Between Cash Market and Derivative Market
Here is the difference between the cash market vs. Derivative market:
Aspect | Cash Market | Derivative Market |
---|---|---|
Meaning | Immediate asset trading | Futures and options trading are examples of derivative instruments. |
Ownership | Ownership is transferred upon delivery. | Never become a property owner. |
Lot Sizes | Allows for the trade of single units | It is not possible to trade single units. |
Dividends | Dividend-paying investors | Dividends are not payable to investors. |
Trading Mode | A trading and Demat account are required. | A futures trading account is required. |
Nature of Assets | Transactions in tangible assets | Transactions in both tangible and intangible assets |
Lot Sizes | Investors in cash markets can purchase or sell in any number, even single units. | The lot sizes in derivatives markets are set, and single units are not accessible. |
Duration | Lifetime ownership is provided by transactions.
| Transactions have an expiration date. |
Nature of assets | The cash market only deals in physical assets. | Markets for derivatives may be used to exchange both tangible and intangible assets. |
Trading mode | Investors in cash markets require both a trading and a Demat account. | Investors in the derivatives market just require a future trading account. |
Dividends | Investors in cash markets have the right to dividends. | Investors in derivative markets have no rights to payouts. |
Ownership | Investors hold ownership of the asset (share) that they acquired. | Investors do not own the asset that they have acquired. |
Participants of the Derivatives Market
Derivative markets consist of four major participants. Given below are a few details of the same:
Advantages of the Derivatives Market
Despite being riskier than primary markets, derivative markets provide several benefits. The next section discusses a few of them:
Disadvantages of the Derivatives Market
Let's talk about the limitations of derivatives markets after reviewing their benefits.
Points to be Aware of While Using Derivatives
When utilising derivatives, investors need to be mindful of a number of variables. These elements are covered in the section that follows:
- Market research is the primary criterion for entering derivative markets.
- Investors must understand the risks associated with derivative investments.
- Margin money is required before trading in derivative markets.
- Futures trading accounts must be opened by a broker that allows derivative trading.
- Asset class and lot sizes should be chosen based on margin capabilities and risk return parameters.
- Positions can be held until the last day of the contract for maximum returns.
Conclusion
Many traders with a high-risk tolerance find derivatives an appealing investment choice. It enables them to manage their risks and benefit from arbitrage. However, it is a high-risk game, and investors who do not take measured risks or over-expose themselves risk falling and losing all of their wealth. As a result, before entering these marketplaces, it is best to be well-versed with them. However, using a reliable stock market app is important to understand the market insights. The above article lets you learn about the difference between cash and derivative markets.