DEFINITION of Trading House
A trading house is a business that specializes in facilitating transactions between a home country and foreign countries. A trading house is an exporter, importer and also a trader that purchases and sells products for other businesses. Trading houses provide a service for businesses that want international trade experts to receive or deliver goods or services.
A trading house may also refer to a firm that buys and sells both commodity futures and physical commodities on behalf of customers and for their own accounts. Prominent commodity trading houses include Cargill, Vitol and Glencore.
BREAKING DOWN Trading House
A trading house serves as an intermediary. It might purchase t-shirts wholesale from China, then sell them to a retailer in the United States. The U.S. retailer would still receive wholesale pricing, but the price would be slightly higher than if the retailer purchased directly from the Chinese company. The trading house must mark up the price of the goods it sells to cover its costs and earn a profit. However, the t-shirt retailer avoids the hassles of importing. The retailer also may be able to simplify its operations by dealing with one or two trading houses to get its inventory instead of dealing directly with numerous wholesalers.
Small businesses that use a trading house can benefit from its expertise and insight into international markets they operate in as well as getting access to vendor financing through direct loans and trade credits.
Trading House Advantages
Economies of Scale: A trading house typically has a large portfolio of clients that provide economies of scale benefits. For example, a large trading house can use its significant buying power to receive discounts from manufacturers and suppliers. A trading house can also reduce transportation costs if it ships to customers in large quantities.
International Foothold: Trading houses have an extensive network of contacts in international markets that help them secure favorable deals and find new customers. They may also have staff working in foreign offices to work with customs officials and manage legal issues to ensure smooth operation of the business.
Currency Management: Because a trading house is continually importing and exporting products, they have expertise in managing currency risk. Trading houses use risk management techniques, such as hedging, to avoid getting exposed to adverse currency fluctuations. For example, a trading house that has a future payment in euros may use a currency forward contract to lock in the current EUR/USD exchange rate.
(To learn more about international trade at a macro level, see: Interesting Facts About Imports and Exports.)