The term “Cash Market” and “Futures Market” might
raise the eyebrows of the people who are completely new to the concept of stock
Market. This article is an attempt to help the beginners to understand about
these basic terminologies which are commonly used by people in the stock
market.
Stock Market/Share Market in India
In India, we have 2 prominent stock exchanges which
are as mentioned as follows
1) NSE – National Stock Exchange of India
2) BSE – Bombay Stock Exchange of India
These
stock exchanges are the medium/intermediary which facilitates people to
buy/sell shares of their preferred companies. Basically, the stock brokers like
the names of Sharekhan, Motilal Oswal, India Infoline etc., get registered with
the stock exchange(s). And commonly people like you and me, can open an account
with these brokers, so as to participate in the business of buying/selling
shares. (Just like how one opens a bank account with a bank, so as to deal with
his/her monetary transactions for day-day or business related activities)
In stock market, the commonly known 2 types of
markets are
1) Cash Market (Equity Market) – It’s a market in which equity shares of the
companies are bought/sold by the market participants like Mutual Funds, FII’s,
and Ordinary Retail Investors/Traders.
For Ex: Let’s take a company i.e., Infosys. We all
know its familiar company in India in the software sector. Now let’s say, one
wants to buy the shares of Infosys (as the person is expecting the price of the
share might go up in the upcoming years based on his/her own analysis) he can
do it by placing a buy order in the terminal through his broker. And to buy
these shares, he needs to have the required cash in his brokerage account.
2) Futures
Market – It’s a market in which Futures contract of the companies/commodities/currencies
are traded by the market participants. A Futures Contract is an agreement between
two parties to buy or sell a specified quantity of an asset at a specified
price and at a specified time and place.
They are normally traded on an exchange which
sets the standardized norms for the futures contracts. In futures contracts,
one can go long (buy)/go short (sell) without owning the asset.
All Futures contracts in the NSE segment is
settled on a cash basis, whereas Futures contracts traded in the MCX allows a
person to take physical delivery of the asset on the contract expiry date, if
the buyer wishes for the same.
For e.g., if one had bought a Gold contract, then
he/she can take physical delivery of the same on the contract expiry date by
paying the total value of the contract, whereas in NSE, if one had bought a
INFOSYS futures contract, no delivery of shares will take place to the buyer,
rather the contract is settled on a cash basis on the expiry date.
(Note: All Futures Contract comes with an Expiry
date, beyond which the contract ceases to exist. For ex. Infosys Futures
Contract for the month of August will expire on the last Thursday i.e., 27th
August (this expiry date is determined by the stock exchange)
Difference between Cash Market and Futures
Market
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Cash Market
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Futures Market
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Dividend
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By Buying & Holding shares in the
Cash Market/Equity Market, one can receive dividend as and when a company
declares it. Like if one is holding shares of Tata Steel in Cash Market, and
if the company declares a dividend, then one is entitled to receive the
dividend amount into his bank account
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By holding shares in the Futures
Market, one won’t be able to receive dividend declared by the company
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Margin
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To take delivery of shares, 100% cash
is required. For ex; if one decides to buy 5000 shares of XYZ Ltd., in Cash
Market which is trading at Rs.100, then Rs.5,00,000 has to be there in the
brokerage account
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One can take position, by having 20%
of the total amount in his account. For ex; if one decides to buy 5000 shares
of XYZ Ltd., in Futures Market which is trading at Rs.100, then approximately
20% of Rs.5,00,000 = Rs.1,00,000 has to be there in the brokerage account
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Expiry
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There is no expiry period in cash
market. If one buys the shares, he/she can continue to keep holding as long
as he/she wants to
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All contracts come with an Expiry
Period, beyond which the contract ceases to exist. For ex., If one buys Tata
Steel August Futures Contract, it will get expired on the last Thursday of
August. So, if one wants to continue holding the long position after expiry,
then one has to buy the next month contract on the expiry day
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Lot Size
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In cash market, one can buy as many
shares as he wants to buy like 5 shares or 50 shares or 400 shares or 610
shares etc.,
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In Futures Market, one can buy only in
lot sizes which are prescribed by the exchange from time to time. For ex: 1
Lot of Tata Steel in Futures Market comprises of 1000 shares
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Overnight Shorts
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If one expects price to go down in the
next couple of days, he won’t be able to go short (selling now and buying
later) now and buying it back in the next couple of days
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If one expects price to go down in the
next couple of days, one can able to go short (selling now and buying later)
now and buying it back in the next couple of days
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Advantage of Cash Market
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It’s ideal
for people who are entering stock market with small capital (Like one can
begins investing/trading by having Rs.10,000 in his/her account)
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One can buy
shares starting from very small quantity like 5 shares, 10 shares etc., as per
his/her capital availability
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If one holds
shares in the Cash Market, he gets an ownership in the company, and therefore
he is entitled to receive the benefits like dividend, bonus issues etc., as
declared by the company from time to time
Advantage of Futures Market
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Futures
Market gives the flexibility to go long (buying) as well as to go short
(selling) on an overnight basis. (One can go short in a futures contract on
Monday and can buy it back on next Monday)
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Rather than
having 100% cash, it’s enough, if one has 20% cash in his account to take
position in the futures market, while the rest of 80% cash can remain in
his/her bank account, which yields small interest as well. (If one has a total
capital of Rs.5,00,000, and to buy 5000 shares of XYZ Ltd., which is trading at
Rs.100, one is required to have around Rs.1 Lakh (assuming 20% Margin) only.
The rest of the capital Rs.4,00,000 can
be placed in a bank account and can be transferred to the brokerage account, as
and when its required)
