Cash transactions are any type of financial transaction where cash is used to settle a transaction on the same date that it takes place. Transactions of this type occur in retail settings as well as with the acquisition of investments. This method is different from a credit transaction, where the process of payment may be implemented on the actual date that the transaction takes place, but does not complete or settle until some specific point in the future.
In investment settings, a cash transaction makes it possible to settle the purchase or sale of an asset on the same date that the transaction is initiated. With other forms of payment, the transaction may not be settled for anywhere from a few days to several months. A true cash transaction requires that all matters related to the transaction, including payment and delivery, are completed on the trade date, and not postponed to some future settlement date. For example, with a forward contract, the assets purchased are delivered at some future point, at which time the investor pays the agreed upon price. With a cash transaction, the purchased asset is delivered immediately, payment is rendered, and both buyer and seller consider the transaction completed.
One of the benefits of a cash transaction is that neither the buyer nor the seller has to devote time and energy to completing the sale at some future date. The transaction is settled in full on the day it is initiated, allowing both parties to move on to other lucrative transactions. A buyer is free to make use of the acquired asset in any way he or she desires, with no need to settle any outstanding obligation to the seller. For the seller, a cash transaction means that there are no worries of a default on the business deal, and he or she is free to use the proceeds from the sale in any manner desired.
While the cash transaction is simple and straightforward, it is not necessarily the most effective investment strategy in all situations. Forward contracts can be very lucrative investments, since they allow the buyer the opportunity to purchase securities at a rate that may be sufficiently lower than the market value that prevails on the agreed upon settlement date. Assuming that the investor had accurately projected the upward movement of the security, the credit purchase may be lower than the cost of purchasing the shares and settling the debt obligation on the date that the deal was initiated.
