Can You Really Make Money Trading Commodities Online? The Mighty FCO
So... let's start at the very beginning as it's a very good place to start... or at least that's what Maria sang in The Sound Of Music.
Brokers sell transactions. Basically Brokers are professional intermediaries. A Broker's Buyer / Seller client base essentially consists of:
Companies wanting to Sell their products and the price lists of the selling companies' products.
Companies wanting to Buy similar products from companies that the Broker has obtained price lists from.
A Broker's profit is derived from the price difference between Buyer and Seller. That is usually a very very very very small percentage of the overall deal value. However, given that brokerages are acting as middlemen and have effectively no direct investment into the shipment, these small percentages are almost all profit and very lucrative. The Broker will generally use the funds of the Buyer/ Importer to finance the entire transaction. This financing is done via the Buyers Transferable Letter of Credit, yet another document which the Broker assists in the compilation of, but does not directly open.
The Full Corporate Offer (FCO) is the key document in Brokerage Transactions. The terms of the FCO are as follows, although it is usually the Seller who compiles and releases the FCO. After each phrase sequence I'll give you the translation from legalese into layman's English so that you understand what exactly is going on here, but there are a fair number of overly legalese terms in here so make sure that you google the definition of any word you do not fully comprehend. Remember that in Brokerage, the devil is always in the details. Know exactly what you're talking about or suffer the consequences... and they won't be pretty.
In accordance with the I.C.C. 500 General Provisions and Definitions XYZ Brokerage hereby confirm under full penalty of perjury and with full corporate responsibility that we are Ready, Willing and Able to sell and guarantee to deliver if required the product indicated below within TEN (10) banking days of the receipt of an acceptable Letter of Credit from the Buyer.
What this says is that according to that particular international commercial law, the parties involved are able and willing to do the deal as specified within ten days of having the payment arrangements met.
Payment is always done by Letter of Credit, or L/C. What an L/C allows the parties to do is ensure that payment will be made if the terms of the agreement are strictly met. If an L/C calls for a hundred thousand tons of rice to be delivered and instead a hundred thousand tons of urea shows up, the L/C will not be paid. Think of an L/C as an escrow account like the one you get when you're buying a house. The money sits safely in a third party's account until the day that the deal is to be consummated. If everything is the way the contracts say it should be, the third party releases the funds and pays up. If there is a screw up, that money doesn't go anywhere until it's resolved.