Business

Difference between Spot Market and Futures Market

Characteristics of Futures Market in Agriculture

Market Market may be of two types, viz, spot market and futures market. Cash dealing which involves the immediate delivery of commodity is known as spot dealing. In the spot market the transactions take place in cash. In future market a contract for delivery in a future month is the basis of the deal. The major difference between cash or are given below:

Spot Contract Futures Contract
1. Used to market or merchandise the commodity. 1. Used to speculate on or hedge against price changes of the commodity.
2. Executed at exchange tables or privately. 2. Executed in the pit.
3. Trades in irregular amounts ( carlots, cargoes, any number of bales ). 3. Trades in round lots (5000 bushels, 100 bales ).
4. Varying lengths of time used for delivery. 4. A future month used for delivery.
5. May or may not have an optional period of delivery. 5. Seller’s option of day of delivery.
6. Usually calls for grade or type of commodity for fulfillment. 6. Seller’s option of grade of commodity to be delivered.

 Characteristics of Futures Market

(1) Contract Grades and Prices: The contract grades of a product (that is the grades that may be delivered in the futures market) are the grades specified by the rules of the Produce Exchange for delivery on future contract. The grade is not specified in the individual contracts.

(2) Unit of Sale: The rules of the Various Exchanges specify the units for which future contracts shall be made.

(3) Time of Delivery: Future contracts are generally made for certain future months. For example, in October, future contracts may be made for December or May. The delivery month selected for future trading are based on harvest periods and the movement of the grain traded in the marketing channels.

 (4) Actual Delivery Vs. Settlement of the Money Differences: Future contracts made upon an exchange contemplate an actual delivery of goods. The buyer has the right to demand the delivery of actual goods and the seller has the right to deliver them. But most are settled through a clearing house operated in connection with the exchange by a settlement based on money differences between the original contract price and the current price at the time of settlement.

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