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Warning
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Simple English definitions for legal terms
normal market
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A quick definition of normal market:
A normal market is when people are willing to pay more for something in the future than they would for it right now. This is often seen in long-term futures or options contracts, where the price for delivery in the future is higher than the price for delivery in the near future. The extra money paid for the future delivery reflects the cost of holding onto the commodity until it is delivered.
A more thorough explanation:
A normal market, also known as contango, is a type of securities market where long-term futures or options contracts are sold at a higher price than short-term contracts.
For example, let's say that a company wants to buy oil for delivery in six months. The price of oil for delivery in six months is higher than the price of oil for delivery in one month. This is because the company has to pay for the cost of holding the oil for six months, such as storage and insurance.
The premium paid for securities with longer maturities reflects the cost of holding the commodity for future delivery. In a normal market, this premium is expected and reflects the market's expectations for future prices.