Spot Market vs Future Market

Spot market:

A market of commodities or securities in which goods are sold for ready cash and delivered immediately is known as Spot Market. Spot market is real time market for instant sale of commodities like grain, gold and other precious metals, Ram chips etc. It is a spot market because transactions take place on the spot.

The contract entered in the spot market becomes immediately effective. Prices are settled at current prices. The primary activities of buying and selling are carried out in spot market. A spot market can operate only where necessary infrastructure is available. For example securities can be traded and money can be transferred through internet.

Future Market:

As opposed to spot markets, deals are stuck for future action in the future markets. A future contract can be defined as a type of financial contract wherein parties agree to exchange financial instruments like securities or physical commodities for future delivery at a particular price. Future contract is a standardized contract to buy at a future date at a certain price.

Commodities in the future market can be reasonably expected to be delivered within a month or so. Future market is not a ready market like a spot market. Future market does not involve primary activity and it is speculative in nature. In the future market, deals are stuck at forward prices. A future contract gives the holder the obligation to buy or sell. Both parties to the contract must fulfill the contract. Here everything is in a fluid state until the security or commodity reaches the buyer’s hands and the consideration reaches the other party.

The future date is called delivery date and a final settlement date. The pre set price is called futures price. The price of the underlying asset on the delivery date is called the settlement price. Future traders are traditionally two groups- hedgers who have an interest in the commodity being traded like farmers, producers and consumers and speculators who seek to make profit by predicting market moves.

Future market is full of risk because anything might go wrong at any stage and the transaction may become invalid or void. Stock markets all over the world are highly volatile and the value of the traded security may go down at any time. Similarly if a commodity like crude oil is traded, the happening of the future event may be subject to political equations between the two countries.

Bonds. Types of bonds

What are bonds? Just as people need money, so do companies and governments. A company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programs. The problem large organizations run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments) to a public market. Thousands of investors then each lend a portion of the capital needed. Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer.

There are different types of bonds:

Government Bonds: in general, fixed-income securities are classified according to the length of time before maturity. These are the three main categories:

Bills - debt securities maturing in less than one year; Notes - debt securities maturing in one to 10 years; Bonds - debt securities maturing in more than 10 years.

Municipal bonds, known as "munis", are the next progression in terms of risk. Cities don't go bankrupt that often, but it can happen. The major advantage to munis is that the returns are free from federal tax

Corporate Bonds: a company can issue bonds just as it can issue stock. Large corporations have a lot of flexibility as to how much debt they can issue: the limit is whatever the market will bear. Generally, a short-term corporate bond is less than five years; intermediate is five to 12 years, and long term is over 12 years. Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a government.

Zero-Coupon Bonds: this is a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value.

Bonds are bought and sold in the open market. Fluctuation in their values occurs depending on the interest rate of the general economy. Basically, the interest rate directly affects the worth of your investment. With bonds, unlike stocks, you, as the investor, will not directly benefit from the success of the company or the amount of its profits. Instead, you will receive a fixed rate of return on your bond. Basically, this means that whether the company is wildly successful or has an abysmal year of business, it will not affect your investment. Your bond return rate will be the same. Your return rate is the percentage of the original offer of the bond. This percentage is called the coupon rate. It is also important to remember that bonds have maturity dates.