With all of the technical analysis and research that goes into commodities investing, it is possible that the most important decision you will make doesn’t concern oil futures or the NASDAQ 100. Every trade you will make has one thing in common; while you might not always buy or sell, you will always be in contact with your futures broker. Your futures broker will be a part of everything you do and this fact makes your decision crucial.
The choice of futures brokers for commodity trading is not simply selecting to start a business relationship with a person, but it includes understanding the investment philosophy and available service of the futures brokerage firm. When choosing commodity futures brokers, there are several concepts to consider:
- Type of brokerage or the clearing arrangement
- A history of ethical business practices
- Amount of time doing business
- Level of commissions
- Level of service
Type of Brokerage Firm
Primarily there are two types of clearing arrangements for futures brokers, namely Futures Commission Merchants (FCM) and Introducing Brokers (IB). An FCM is a group of futures brokers that accepts orders to buy or sell options or futures contracts and accepts money or other assets from customers in connection with such orders. An IB, on the other hand, is a commodity broker who delegates the work of the trade execution, floor operation and back office operations to a FCM and acts primarily as an intermediary for your investment options.
History of Ethical Business Practices
Think about it this way; you will trust your commodity broker with a lot of money. Shouldn’t he or she have a history of doing things the right way? In addition, the brokerage firm should always have your best interests in mind and resolve any problems in a fair way. A good way to check this is to contact the National Futures Association and find out if the broker has any disciplinary actions against him or her; a few minutes worth of checking might be your best investment advice.
Amount of Time Doing Business
80% of all businesses go under within the first five years. A beginner investing makes enough of his or her own mistakes; a futures broker is even more vulnerable. Because of this, it is wise to choose someone who has five or more years in the business, giving them time to establish their investment abilities.
Level of Commissions
One of the most common investing mistakes is not knowing the cost of doing business. Commodity trading creates a lot of trades, so the cost can accumulate quickly. It is a wise investment basic to know how much the commissions run for your trades; you can easily find this out before deciding on your futures broker.
Level of Service
You need to ask yourself; how much help do I need? If you are learning to invest, you will likely need more involvement from your futures broker; if you have a lot of experience, you might need less. It is important to decide this because the level of support varies whether you are using a discount futures broker or a full service brokerage firm. Either way, it is important to honestly evaluate your current abilities and choose based on your needs.
Conclusion
Selecting a futures broker and a brokerage firm are very important decisions; no brokerage firm can guarantee that you will make money but it is a very important part of the process. You will find that choosing a futures broker for your commodities trading that will handle your account with the highest degree of integrity and professionalism will enhance your trading experience.
Speak Your Mind