Cash Market (Spot Market)

Definition

The term cash market refers to a marketplace where securities and commodities are exchanged for cash with immediate delivery.  Cash markets can be regulated or unregulated markets.

Explanation

Also referred to as the spot market, the cash market is a physical place where a buyer provides cash to a seller in exchange for the immediate delivery of the asset.  A cash market is the converse of a futures market, where the buyer and seller agree to exchange the asset at a future point in time.  The market can be both a regulated or unregulated market, the only requirement is the ability of the location to facilitate the transaction between the buyer and seller.

When making purchase or investment decisions, buyers and sellers will oftentimes compare the spot price of a commodity to its futures price.  The difference between these two values is due to time and provides insights into the market's overall expectation of the commodity's future price direction, which is influenced by factors such as weather, product demand, and supplier capacity.

Example

Transactions occurring in a cash market can be both regulated and unregulated.  For example, an investor wishing to purchase shares of common stock of a publicly traded company can conduct this transaction on a stock exchange.  The exchange of cash for shares of common stock is typically facilitated by a broker, who charges a commission when executing the order.  When the buy order is placed, cash is immediately withdrawn from the investor's account and shares of common stock are delivered.  In this example, the stock market is acting as a regulated cash market.

Related Terms

cash commodity, carrying charge, Bretton Woods Agreement