The cash market is the platform for buying and selling financial assets, such as stocks, bonds and commodities, through cash and on-spot. Cash-market settlements are made an on-spot term for cash-based transactions where the buyer pays, and the seller delivers assets instantly.
How Cash Market Works
The cash market operates at present asset prices, so transactions are executed. Buyers and sellers agree on a price, and the payment is made instantly or within a short settlement period. In futures trading, contracts call for future delivery, while in a cash market, the asset is an immediate ownership transfer.
Advantages of a Cash Market
Here are some reasons why the cash market is important:
- Immediate Ownership: Buyers get ownership of the asset as soon as the transaction is completed, providing direct control over their investments.
- Price Transparency: Prices in a cash market depend very much on real-time supply and demand, ensuring fair valuation.
- Less Risky than Derivatives: This creates less risk since transactions are settled instantaneously as compared to futures or options trading.
- Liquidity: A well-functioning cash market guarantees a smooth flow, thus allowing investors to buy and sell assets seamlessly.
Conclusion
Transparency, immediate ownership, and liquidity are the three parameters establishing the favourability of cash markets for most traders. Keeping a close watch on cash market trends helps the investor summarise and track investment decisions.