Difference between Cash and the Derivative Market ?
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.
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.
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.
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.
