Wednesday, February 4, 2009

Commodities: Choosing Commodities Futures Broker

Commodities over the next five to ten years will outperform the majority of other investments by a long shot, and so it's extremely important to understand the sector, how it operates, and the best way to invest in them. To that end, let's look at one key element involved in your successful entry as a commodity trader into the sector: choosing a commodities broker or commodities futures brokers.

Just so you don't get confused, you may hear a commodities broker called a futures broker, commodity futures broker, commodity or commodities broker, or a commodities brokerage. Either way, when you hear those terms and other forms of them, it's referring to those who can help you make decisions and execute the proper trades.

One key thing to keep in mind is you're choosing two things when looking a trading commodity options or futures. You're choosing a commodity futures brokerage company, as well as an individual commodities broker within that firm. Both are important decisions going forward.

Of course if you're experienced to a certain degree and understand the various elements of trading in commodity futures and options already, you could simply trade through an online commodity brokerage at very low prices per trade. But this article assumes you prefer to use a live human commodity broker, not the internet.

So what should be considered in making a decision on choosing a commodities futures broker? Like almost any other type of investing or business, you want to check into the length of time they've been in business, if there are any ethics violations that were substantial (in finance there will always be disgruntled people complaining when they lose money). I'm talking here about real ethics violations that are either criminal or show a lack of concern about the client. Also a commodity brokerage firm needs to be competitive on commissions, unless they've shown they have outperformed their rivals in such a way as to deserve high commissions. And lastly, you need to know what types of services the futures or options brokerage offers.

As far as ethics go concerning choosing a commodities futures brokerage firm, the best thing to do is check with the National Futures Association to see if there have been any disciplinary actions taken against the futures firm.

While this could happen to any brokerage company in general, it is in your best interests to ask your potential commodities broker to explain what brought the complaint and how it was resolved. Many times, as I mentioned, disgruntled commodity traders that lost some money complain simply because they lost some money.

One thing to be careful when checking out a commodities brokerage is the number of years they've been in business. If you check them out and find a clean record, all that may mean is the commodity brokerage hasn't been in business long enough to have the inevitable complaints that come against it.

So if you look for a futures brokerage that has been around for about five years or longer, you can be assured that they at minimum know how to run a business, and should have a track record of arbitration over complaints from clients. It's not that they have complaints that should worry you (as long as they're not in abundance) but how they handled the complaints and how the aritrators ruled.

Because some commodities brokerage firms can settle disputes before they are presented to the NAF, and so their complaint record could look "clean," you should perform due diligence with those you know who may be trading options or futures with the company, or go to industry organizations like the National Introducing Brokers Association to aid you in your search.

As far as commissions charged by a commodity futures broker, that's probably the least factor to consider when trading commodity options or futures. It may be more profitable if you're starting out in trading commodities to use a more experienced, and probably more expensive commissioned commodities brokerage firm.

When you learn the ropes and take care of doing your own homework, you could then trade with discount commodity futures firms which can save you a significant amount of money if you make a lot of options or futures trades.

One thing to be aware of in connection to commissions is in how the commodities brokerage or commodities futures broker handles the way they encourage you to invest or trade commodity options or futures.

There's a practice called churning, where the commodity broker continue to invest your money in options in order to earn commissions, and do little if anything to make you money. If you're charged above $90 for a round-turn, or even above $100, be very cautious of using the firm and trusting your money with them.

In most commodity investment firms you can get by with $85 a round turn or less, so go with them, as they're as reputable as any.

Another thing to look for with these types of companies is their fixation on commodity options, which require your money upfront and not on the backend. This is why these types of firms push you toward options, as they generate more money for them because of the upfront costs, so they don't have to wait for the backend.

You also get no possibility of margin calls or deficits because of the utilization of options. This doesn't mean investing in options is wrong or unethical, just that unethical companies push many people disportionately into the sector, and not much more than separating them from their money happens, as they continue to "churn" or turn over their money, gaining a commission each time the practice is enacted.

Although these types of commodity futures brokerages could be anywhere in the USA, the majority are on the east coast of southern Florida or in the Los Angeles region.

After selecting a commodity brokerage options and futures company, then comes the important part of making a decision on who your individual broker will be.

The two most important aspects here are experience and knowledge of commodities markets, and absolute honesty and integrity.

Because you should be looking at a long term relationship with a commodities futures broker, you should also fell like that individual is able to communicate well with you, so personality could be a secondary element of importance. The reason that's so important with a futures broker is even if you're doing farely well with you investments, you could start to have doubts if open communication isn't one of the strengths of the broker.

From there, make sure you communicate your goals and purpose for investing in futures or options, as they could even change from trade to trade, depending on why you're entering the commodities market.

Finally, in choosing a broker make sure they're knowledgeable about whatever commodities options or futures sector you want to invest in. You don't want him to be good in grains but not know about precious metals. You want him to be good in both if that's part of your commodity investing strategy.

So choose you commodity futures trading firm well, and zero in on the commodity futures broker even more once that is completely. Commodities are going to outperform other investment sectors in the years ahead, and those with a long term strategy and who do their homework will be much more successful than those that don't.

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