Cash and Carry Transaction

Cash and Carry in the stock market is not the same thing as paying cash for your groceries and then carrying them home. Rather, it refers to taking advantage of a great price in the commodities market that happens to be below the futures contract price.

Also known as base trading, let’s say Pork Bellies Inc.’s stock is trading at $50 per share on the stock exchange, but is posted at $60 per share on the futures exchange. The savvy trader immediately buys the stock at $50 and then “shorts” (locks in) the futures price at $60 per share. The trader keeps the stock until it is due according to the short futures contract. The difference between the spot (cash) price and the futures price ($10) provides the profit, less any fees or other costs. But in the computer age, these price discrepancies are usually caught quickly and changed.