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  • Difference between Cash and Derivatives Markets

    Cash vs Derivatives Markets

    Both Cash and Derivatives markets are components of a wider financial market. However that is where the similarity ends. They are poles apart when transactions in these markets are put into perspective. So let’s check out the difference between these markets.

    What is the difference between Cash and Derivatives market?

    Following points list out some of the basic difference in these markets.

    Cash Market

    1. In cash market one can buy single indivisible unit of a company called a share/stock.
    2. Investment in shares represents an ownership in that company.
    3. People invest in cash market mainly to earn to income via dividend and capital gain via price appreciation.
    4. Investment in cash market does not offer any leverage i.e. the entire amount needs to be paid up front. For e.g. in order to buy 100 shares worth $50 one would need to pay $5000 up front.
    5. Almost all cash market transactions are carried out on an exchange.
    6. Although there are some grey markets the demand in these markets is very low and diminishing.

    Derivatives Market

    1. In derivatives market one has to but securities in lots specified by the contracts.
    2. Investment in equity or stock derivatives does not represent an ownership.
    3. The main purpose for investment is derivatives. However a major chunk of transactions in derivatives can be attributed to speculation solely due to the potential capital gains that can be made on a right choice.
    4. Transactions in derivatives are highly leveraged. One can trade in derivatives upon payment of Margin which is a certain percentage of the entire transaction amount.
    5. Derivative transactions are carried out on exchanges as well as Over the Counter (OTC).
    6. Futures and Options (also called Exchange Traded Derivatives) are two of the widely traded derivative products on Exchange while Forwards, Swaps etc are traded over the counter.

    Posted under: Finance
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