What is a futures market?

A futures market is a financial market where investors trade commodity and futures contracts. The futures are derivative contracts that are made for an underlying security or commodity which is to be delivered on a specific date in future at a price which is pre-decided in the contract.

Traditionally, traders used to shout loud and use hand gestures in the trading pit to communicate with other traders. Now the trading pit does not exist, and trading takes place electronically like other markets around the globe. Regulatory agencies are responsible for monitoring futures markets.

Each exchange has a different regulatory agency. To illustrate – Financial Conduct Authority (FCA) regulates the United Kingdoms’ market. Similarly, Commodity Futures Trading Commission regulates the United States futures exchanges.

The futures market provides the opportunity to speculate and hedge to the investors. If an investor is risk-averse and seeks price stability, then trading in futures contracts will be appealing for them. The cash market is a marketplace where securities and commodities are traded in exchange for cash, that is, transactions are settled on a cash basis. It is also known as spot markets.

Cash transactions can take place through both the stock exchange and over the counter. The purpose of entering a cash market is to gain or sell the ownership of the commodity or security.

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