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Making Sense Out Of Commodity Trading

One of the most powerful trading platforms in use currently is the one that the commodities are being traded upon. What makes it powerful is the possibility that huge sums of money can change hands from right across the globe and the system can handle each and every one of them quickly and without any mistakes what so ever. Then again, it is not as if everyone who would want to deal in commodities needs to have a deep pocket all the time. There are always the small fry in the markets, be it the equity or the commodity or the forex, who would be seeking to make a fortune on a small sum wagered.

The peculiarity of the commodities trade

Typically when folks undertake a trading activity, they seek to buy or sell goods or services for the most part. There is going to be a changing of hands of products in exchange for money. This is the basic premise of conducting trading activity right across the world.

Now when it comes to the commodities trade, there are a lot of people that focus on taking advantage of the differences in prices of commodities that occur within a trading day or session as it is commonly called. The strong point of these intra-day trades is that it can be traded by just funding the margins and does not need the full amount to be put up by the buyer.

Understanding the concepts of trade on margins

By margin trading, it is the practice of executing trades without having the full amount needed to buy a product or commodity. Instead, a small margin which would be a fraction of the full amount needs to be paid to take forward the trade. It is understood here that the trader would make good the full payment before a certain cut off time. This would be the holding period allowed for the trade.

Before the expiry of the holding period, if the trader gets to sit on a sizable profit due to the appreciation of the price of the commodity, then he could liquidate his position and pocket the difference between the selling price and the cost of acquisition. Considering the relative small amounts of money that the trader has to put up as margins, this would be a rather lucrative deal to put through if the call is right.

Variations in the margins

With the typical commodity exchange, the margin is never a fixed ratio or fixed percentage. Most exchanges do use the margin rates to control the activities on the markets. So if there is excess speculation at a particular time, then the margin rates could be hiked to force those without the relative long term view to exit the system. Thus the concept of using margins to trade is used to control the most active trading groups as with the general occurrences of the trades on a daily basis.

The strong points of a good commodity broker

As far as the retail participant in the commodities market is concerned, he need to access the markets through a registered broker. The broker would at his behest put through the necessary trades on the floor of the exchanges. There are the large business houses that deal in commodities that would be permitted to deal directly on the bourses. But this require stringent regulatory norms to be fulfilled beforehand and the typically retail commodity trader would not be able to comply with the requirements.

Thus for all practical purposes, the retail trader has to make use of the services offered by a registered broker to execute the deals. Most financial centers across the world do have brokers that are registered with the major exchange houses and who would put through a deal for a fee or brokerage. Thus to the broker the brokerage is a means of earning an income too. It would be pertinent at this point to lay out the strong points of a good broker

Transparent: Most of the commodities houses across the world insist on having a system in place that is as transparent as could be possible. The laws and by-laws are so framed to ensure that there is transparency in the deals as well as in any form of interaction between the brokers and their clients at any time. When dealing with a broker, if at any instance he appears to be hiding something from the client, then it would be best to seek out another person to deal with.

Clear cut procedures:

When dealing with any commodity broker, the first positive sign would be if he does discuss the procedures that are followed during transactions. If possible, it would be worth the while to insist on written down procedures. If the particular broker is following any form of Quality Management Systems, then establishing written down procedures for work would be a done affair. Once a set of strict procedures are laid down, the stress must be to see that the steps as laid out are followed at each instance.

Payments:

: Nowhere in the world do exchanges of any type deal in cash. So if a broker does insist on having cash transactions most of the time, it would certainly not be a positive sign. Even with the account payments before and after the transactions, it is important to insist the broker stick to the time let out by the relevant exchanges. All exchanges do provide for time frames to follow during dealings.

Approachability:

: No matter how big or small the broker turns out to be, he must be reachable at all times during the working day. The first signs of defaults at the exchanges or in any dealings would be seen in the manner the broker deals with the client. An alert client would be able to tell out that all is not well and take suitable evasive action. Nobody would want to engage in litigations if they can be avoided and that would be the best policy under any circumstances.

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