Economics

Spot market vs futures market/cash vs term payment

Difference between Cash Payment and Term Payment

The difference itself is quite simple and you certainly already know it. Spot market vs futures market

Cash payment is made in its entirety, in a single action. In installments, the amount can be split over two months or more, according to the policy of each trade.

Such installments may or may not be increased by revolving credit interest or any other type, depending again on the policy of each trade, or on our own financial discipline.

However, the real question here is: do you know when to pay in cash and when to pay in installments? Have you thought about the different situations where both possibilities are available to us?

These, in turn, are more incisive questions! Regardless of what your answers were, we should note some important points in view of this need for choice: Spot market vs futures market

  • Our own financial reality;
  • What is the real urgency of purchasing the product;
  • Whether or not we have a financial reserve for emergencies;
  • Based on financial mathematics, what are the yield calculations along the installments;
  • Still based on present value calculations, whether there is in fact a discount for cash payment or not.

Among a number of other points. The truth is, there is no rule, as this decision totally depends on each particular situation. Spot market vs futures market

What is Spot Market?

Basically, the spot market corresponds to a market of immediate operations, when the parties involved enter into an agreement.  

Therefore, when we buy a certain share of a company, for example, it is defined at that exact moment the amount to be paid, as well as the number of securities to be obtained. Spot market vs futures market

From this negotiation, there is no going back. The money has already been paid, and the action belongs to us to negotiate in the best possible way!

What is the difference between Spot Market and Futures Market?

The main difference between both markets is related to the time of settlement.

Unlike the spot market, in the futures market  the payment is previously established between both parties to the agreement, for a forward date!

That is, the agreement can be made at any time, but the exchange between goods and financial amount is pre-defined for a future date. This is exactly where the name of this second class of market comes from. Spot market vs futures market

It is worth clarifying that, even if the settlement has not yet taken place, it will no longer be possible to exchange any character, such as changing the value traded or replacing the asset with any other.

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