Future market :
The future is a common market for day trading. A futures market is a market where traders buy and sell contracts for futures. They are also buying and selling commodities. The contracts for the future are for delivery on a specific date of the future. Participants are trading in a futures market, buying and selling their future delivery contracts and goods. The market offers a medium for speculation and hedging complementary activities.
“Market at which participants can buy and sell commodities and their future deals to delivery.” For instance, the farmer who sells maize to the seller at $2 per pound and the seller sells it at $5 per pound and both make a profit at that price, they will want o keep those costs at a fixed rate. The investor agrees that the investor agrees to pay the difference to the maize farmer if the price for maize gets below a set rate. If maize rates go above a certain price, the investor will be able to maintain earnings. if the maize price exceeds the agreed rate, the investor shall pay the difference and the wholesaler shall receive the maize at a predictable rate. If the maize price is below the agreed-upon rate, the wholesaler will pay the same price and the investors get the profit.
They are two types of participants in future market:
- They are the producers or consumers of assets or commodities and, by participating in the futures market, they want to ensure that they get a specific price for their products or that they have to pay a price for a commodity in the future.
- The other division of the futures market is the Speculators. They do not have an intrinsic stake in the underlying commodity or asset but seek to profit from the movement of the economy.
Features of Future Market:
- Future contracts are traded on an exchange during the private trading of forwarding contracts.
- Future agreements require a margin to be released at contract initiation, steadily rising with fluctuating futures prices. In a forward contract, there is no such margin requirement.
- Since they are traded on an exchange, there is high standardization of futures contracts. On the other side, forward contracts are customized according to counterparty requirements.
- While the forward market is not controlled, the state controls the futures market.
Advantages of the future market:
- Margin requirements are well established in the futures market for most commodities and currencies. A trader thus knows how much margin a contract should bring up with.
- Most futures markets offer increased liquidity, especially in currencies, indexes, and commodities that are widely traded. This allows traders when they want to join and exit the market.
- The value of assets decreases over time in choices and significantly decreases the trader’s profitability. This is called time decline. A futures trader must not worry about declining time.
- In industries with high price changes, forward contracts are used as a hedging tool, farmers, for instance, use these contracts to safeguard themselves from the danger of falling crop prices.
- For better risk management, many people enter into forwarding contracts. Companies regularly use these contracts to limit the danger of foreign currency exchange.
- Some brokers may insist that customers close their positions before delivery.
- Not as flexible when it comes to accounting.
- Trade-in predetermined quantities that are inflexible for an accurate accounting
- Traded mainly on US exchange
- To get the full advantages, you need to be a professional trader.
Difference between the cash market and futures market:
|Basics comparison||Future market||Cash market|
|Lot size||Anyone has to buy a lot of sizes which as already defined. such as nifty lot size is 75||Anyone can buy a single share in the company|
|Payment||For the initiation of a Future contract, only margin cash is required to be paid.||The full amount you have to pay at the time of buying shares|
|Objectives||Futures can be traded for Arbitrage, hedging or speculation purposes.||They can buy shares for investment purpose|
|Holding periods||In the future market, you have an expiration minimum of 3 months. After we have purchased new||If you buy a share in the company. You can hold the life time|
|Ownership||In futures when you want to trade, you never be a shareholder||In the cash market, you can become a shareholder of the company but when you buy shares and take delivery. You have to hold the shares to become the shareholder.|
|Dividends||There is no entitle of dividend in future markets||If you have shared it in the company . You can receive the dividend|
|Delivery||They did not take any delivery in the future agreements on till expiration date.||T+2 days have to be done|
|Meaning||This market takes place where only future agreements are brought and sold at the decided date and previously defined price in the future.||A place where financial instruments are traded and stocks are delivered|
Cash market :
A financial market is a cash market, a spot market, or a physical market. Traders purchase and sell commodities or financial instruments for instant delivery in this industry. Anybody can trade different entities between a contract of financial instrument. In the cash market, the settlement occurs within two working days. In other words, you must pay full cash when receive your purchases within two days of trade dated.
For example, Investors want to purchase the share in common stocks of a publicly-traded company. The company conducts transactions on the stock exchange. There was a broker for exchange of cash for common shares buy they have commissioned by executing this order. Here when the buyer willing to pay cash on spot then the investor can withdraw the cash and shares of common stocks are delivered. In this example, the regulated cash market is acting in the stock market.
You may also like to Read….
- SMA strategy in forex trading?
- How many types of growth models in the stock?
- What is international trade?
- How nifty is calculated?
- What is nifty50?