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6 differences between cash market and derivatives market
Here are a few differences between the cash and the derivative market.
Two of the most popular places to trade and invest in the capital markets is the cash segment or the futures segment also called the derivatives segment. There are plenty of differences between the cash segment of the capital market and the futures segment.
Here are few of the easy to understand differences.
1) Ownership
When you buy shares in the cash market and take delivery, you are the owner of these shares or you are a shareholder, until you sell the shares. You can never be a shareholder when you trade in the derivatives segment of the capital market. This is because you just hold positional stocks, which you have to square-off at the end of the settlement.
2) Holding period
When you buy shares in the cash segment, you can hold the shares for life. This is not true in the case of the futures market, where you have to settle the contract within three months at the very maximum. In fact, when you buy shares in the cash segment they can also be trans-generational, that is they can be transferred from one generation to the other.
3) Dividends
When you buy shares in the cash segment, you normally take delivery and are a owner. Hence, you are entitled to dividends that companies pay. No such luck when you buy any derivatives contract. This is not only true in the case of dividends, but, also other corporate benefits like rights shhares, bonus shares etc.
4) Risk
Both, cash and futures markets pose risk, but the risk in the case of futures can be higher, because you have to settle the contract within a specified period and book losses. In the case of shares bought in the cash market, you can hold onto them for an indefinite period and can hence sell when prices are higher.
5) Investment objective differs
You buy a contract in the derivatives market to hedge risk or to speculate. Individuals buying shares in the cash market are investors.
6) Lots vs shares
In the derivatives segment you buy a lot, while in the cash segment you buy shares.
7) Margin money
In the derivatives segment you pay only margin money for example, if you buy 1 lot of Punjab National Bank (4000 shares) you just pay 15 to 20 per cent of the cost of the 4,000 shares and not the entire amount. That is not true in the case of cash segment, where you have to pay the entire amount and not only margin.
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