What is a Cash Market
A cash market is a marketplace for the immediate settlement of transactions involving commodities and securities. In a cash market, the exchange of goods and money between the seller and the buyer takes place in the present, as opposed to the futures market where such an exchange takes place on a specified future date. This type of market is also known as the spot market, since transactions are settled on the spot.
BREAKING DOWN Cash Market
Cash market transactions can take place on either a regulated exchange or over the counter (OTC). In contrast, transactions involving futures are conducted exclusively on exchanges, while forward transactions, such as currency forwards, are generally executed on the OTC market. For a specific commodity, the price in the cash market is usually less than its price in the futures market. This is because there are carrying costs, such as storage and insurance, involved in holding a commodity until it can be delivered at some point in the future.
An Example of a Cash Market
The New York Stock Exchange (NYSE), using a real-world example, is a regulated cash market in the United States. The NASDAQ would also be considered a cash market. Therefore, there can be more than one cash market within an economic region.
However, the NYSE is the largest stock exchange in the United States and is therefore the largest cash market available to domestic investors. The NYSE is responsible for setting stock trading policies, supervising investors and other member activities, and listing securities registered with the NYSE. This stock exchange has listings for stocks, bonds, mutual funds, exchange traded funds (ETFs) and derivatives.
It's important to note that derivatives include futures and forward contracts, as well as call and put options. This means that the NYSE acts as a futures market as well as a cash market. So, if an investor invests in a derivate listed on the NYSE, he is not conducting a transaction on a cash market.
However, if the same investor instead decides to invest in a company's publicly traded stock, he is conducting a cash market transaction within a cash market. If, for example, the investor has an online brokerage account with Charles Schwab, he can execute an equity trade for immediate delivery. This gives investors an easier and more immediate way to trade stocks, rather than relying on a physical broker who takes trades over the phone. In return, online brokers like Charles Schwab charge commission fees somewhere between $5 to $10 per online equity trade. This means that each time an investor purchases and sells a block of stock on a cash market, he is charged a commission fee.