Process Flow in Commodity Futures Trading

Commodity Trading Process

After the process of opening account is done the investor may want to trade in commodity. IT is important to understand the process after the trade is placed.

An investor places a trade order with the broker (at the dealing desk) on phone. The dealer puts the order in exchange trading system. At the initiation of the trade, a price is set and initial margin money is deposited in the account. At the end of the day, a settlement price is determined by the clearing house (Exchange). Depending on if the markets have moved in favor or against the investors' position the funds are either being drawn from or added to the client's account. The amount is the difference in the traded price and the settlement price. On next day, the settlement price is used as the base price. As the spot market prices changes every day, a new settlement price is determined at the end of every day. Again, the account will be adjusted by the difference in the new settlement price and the previous night's price in the appropriate manner.

In the next chapter we will learn about the process of Dematerialization of commodity contracts.

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