When you start trading in commodities, it is imperative for you to learn about the different entities for such transactions, including the broker, the commodity exchange, the bank and, of course, you and your trading account.
<p>Know the essential entitites in commodities investing—the investor, broker, exchange, bank and the trading account</p>
When you start trading in commodities, it is imperative for you to learn about the different entities for such transactions, including the broker, the commodity exchange, the bank and, of course, you and your trading account.
THE BROKER
The broker is a critical entity for you in commodities trading. So, you must be prudent while choosing one. Many equity brokers are members of the commodity exchanges. You must consider the following to choose the right one.
Presence. One of the important factors in choosing a broker would be the number of branches and franchise network he has. The more the better. It is important to remember that the risk-management framework is standardised for all brokers. At the same time, there are some other factors that need to be considered.
Experience. An experienced broker is likely to offer better services and help you make the most of available opportunities.
Registration. Stay away from brokers who are not registered with the exchanges. You must ensure the broker is indeed a member of the exchange and is registered with the relevant regulator. A commodities broker must be registered with the Forwards Market
Commission (FMC) and the exchange where he offers trading services. You could check the FMC and exchange websites to find out whether he is registered with the authorities.
Income source. Income from brokerage services should be a major part of the broker’s income. If financial services are not the primary source of income, it might cross-sell products.
Trading platform. Another important point to check is whether the broker has the right trading platforms for the commodities you want to trade in. Some of them offer online trading platforms, while others have offline set-ups. Whichever trading platform you choose, it should be easy to navigate and should involve minimum steps for executing a trade.
You must also find out whether the brokerage fee is on a par with other broking firms that offer similar services. Also note, a broker cannot offer portfolio management services (PMS) in commodities. It is illegal to do so.
THE HOW AND WHAT OF A TRADING ACCOUNT
You must have a bank account from where you would disburse funds to the broker for transactions. Some brokers prefer certain banks. So you need to choose your broker before opening an account. If you go for online trading you could link your bank account to your trading account for easy flow of funds.
Trading account. One needs a trading account to buy and sell commodities online. One can conduct trade through phone or by installing the requisite software on one’s computer.
Electronic accounting. NCDEX offers COMTRACK system for electronic accounting of commodities. It is a Web-based software that connects the exchange, warehouses, assayers, members, Comtrack participants (CPs), investors and clients. The investors can open an account in the COMTRACK system through a CP empanelled with the exchange.
THE EXCHANGE
There are six major exchanges in India that offer commodities trading. They are the National Commodity and Derivative Exchange (NCDEX), the Multi Commodity Exchange of India (MCX), the National Multi Commodity Exchange of India (NMCE), Indian Commodity Exchange, Mumbai (ICEX), ACE Derivatives and Commodity Exchange, Mumbai, and Universal Commodity Exchange, Navi Mumbai. All have national presence and offer electronic trading and clearing systems.
THE INVESTOR
You are the most important entity in the entire process. You need to ensure that you pick the right broker as well as the commodity you wish to trade in before you start trading. The final call on any transaction should be yours. After all, it’s your money!
GET GOING
You are the most important entity in the commodity trading process
kavya.balaji@outlookindia.com