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How To Successfully Choose a Commodity Futures Broker
Why Commodities will be huge for Years
There is no doubt that demand for raw materials or commodities will continue for many years into the future, as emerging markets and fast-growing middle classes within those markets, ensure demand for desirable products for a long time.
Markets like China and India are only beginning to produce significant middle classes, and people within those middle classes have an insatiable desire for tasting the good life, and they now have the financial resources to make that a reality, and a growing number of them in the years ahead will as well.
So with that as a backdrop, anyone interested in creating wealth needs to look at commodities as being part of their investment portfolio.
That means that we need to some research on how to hire a commodity futures broker in order to prepare for our investments.
What is a Commodities Broker?
Before starting to look at the requirements of someone you want to hire, understand that there can be a number of terms used to describe someone that trades on your behalf in the commodities markets.
For example, some of the terms you may hear thrown around could be futures brokers, commodities broker, commodity futures broker, or simply a commodities brokerage.
All of them pretty much mean the same thing, with the exception of a commodities brokerage, which refers to the umbrella firm the broker works under.
In the end, all it means is they are someone able to execute trades for you, and/or give input on the best possibilities available to you in the sector at this time.
Why you need a Broker
As I mentioned, there are two elements to consider when beginning your search for a commodity futures broker.
One, you're choosing a commodity brokerage firm, and then within that firm you're choosing a specific broker you feel comfortable working with. Each one is an important decision to your wealth building efforts.
This article assumes you know nothing or little about trading options and futures, so while you could trade through an online brokerage with very low trade commissions, you would have to have the knowledge, time and ability to intelligently do that.
The only other option is to find a brokerage and broker.
Commodity Futures Broker
Choosing a Brokerage
Before choosing an individual commodities broker to work with, you should do your homework about the brokerage itself.
The first thing to check is the length of time a firm has been in business. This isn't primarily to value length itself, but you want to be able to examine their track record.
A company could be a good brokerage, but a short time in business makes it impossible to have any type of way to see how they handle things.Mostly you're looking for complaints and potential ethics violations.
It's not that most companies won't have some of these - they will. What you're looking for is how they handled and responded to the complaints.
You can be sure within the investment arena you're going to have those who are dissatisfied because they lost some money. It's inevitable. So there will be complaints there for any company, even the best ones.
What you want to know is if there were any extraordinary circumstances in connection with them. We'll get into what that could be in a little bit.
The point is you're looking for real ethics violations, not petty complaints about losing money from a legitimate trade.
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Where to Find a Brokerage Firm's Record
The primary place to check to discover the record of a brokerage is through the National Futures Association. It's there that you will find ethics complaints and if there was any disciplinary action taken against the firm.
Once you take those steps, you can then present the information to representatives of the firm and ask them to explain the circumstances surrounding the violation and what its outcome was.
Again, it's not that there is complaints that is the reason for doing this (unless there are an outrageous number of them), rather, it's the way those cases were handled and arbitrated that should be of interest to you.
If they treated clients a certain way in the past, more than likely they'll do the same in the future, whether good or bad. You're looking for patterns.
Finally in this research, you want to see how the arbitrators in the case decided, whether it was for or against the company, and if they added any significant comments that would help you make a decision on whether to go with the commodity brokerage or not.
Caveat to Years a Commodity Brokerage has been in Business
One important thing to take into account as far as how long a commodity brokerage has been in business, is they may not have much of a trail to follow, even if they've been in business for a long time.
This should raise some red flags, as it probably means the company settled disputes before they became a matter of public record.
I'm not saying or implying they're necessarily trying to hide something, what I mean by red flags is you need to dig a little deeper to find the reality of the situation over the years.
The two ways to do this is simply through your network of contacts who may have used the company. Just ask them, as you would about anything else, how they were satisfied working with them and how they were treated.
Another way is through professional organization connected to the broker industry like National Introducing Brokers Association, which will help you in your search to determine the facts.
There is only one reason you should choose a brokerage firm which asks for higher commissions than its competitors, and that's superior performance. And that performance should be in conjunction with the percentage of higher commissions asked for.
While experience does count, if it doesn't result in better returns on your investment, there's no reason to choose a brokerage for that purpose alone.
Because we never know the financial condition of a commodity brokerage or commodity broker, we have to understand they're human, and are subject to temptations to have us make more trades than we have the desire or inclination to do.
A commodity broker makes money through commissions. The only way they can make a commission is if you make a new trade. It's there that the temptation to push you to trade beyond your parameters that you must oversea your broker and account.
In the commodity sector this is called churning. That means the broker continues to invest your capital in commodity options in order to grow their commissions. Those who do this don't care or aren't affected by whether you make money or not; their commissions are based solely on the number of trades they can make.
Ask the commodity firm or broker how much they charge for a round turn. Most commodity companies charge no more than $85 a round turn or less. Anything above $90, you want to be cautious of deciding on that company. Some firms charge way above $100, which really can dig deeply into your investment capital.
Speaking of options, watch out for companies that want you to invest an inordinate amount of money in commodity options. Options require money upfront, and not on the backend.
The reason why some do this is because they want working capital for themselves right away, otherwise they'd have to wait to get their capital on the backend.
Options don't allow you to make margin calls or deficits, so they're better for the company than other ways of investing in commodities.
Be careful to understand that I'm saying options in and of themselves are unethical. They're not. What I'm saying is the overemphasis upon them is where it can be better for the company than you, and can cause conflicts of interest.
Unethical companies push churning for the sole purpose of their own benefit and not their clients'. In other words, they make money at your expense without thinking of how it will affect you.
While churning could happen anywhere, as far as the United States goes, most of it happens in the Los Angeles area or the eastern coast of Southern Florida.
Choosing a Commodity Broker
Once you've done your homework and chosen a commodity brokerage firm, you now must make the important decision on the individual broker within that firm.
There are three things to look for here
1. The broker should have significant experience and knowledge of the commodities markets.
2. Even more importantly, you want your commodity broker to have complete integrity and honesty.
3. Less important, but vital to some, is the chemistry you have with your broker. Commodity investing should be a long term endeavor, and most people want to feel comfortable working with their broker.
One of the key elements here is communication. If you don't feel comfortable communicating with a broker, you should probably choose another.
This is important because communication in commodities could be the difference between building wealth and tremendous losses.
Open communication is important because investment involves the trust factor. If there's a hint of suspicion by an investor toward a broker, it could cause poor decisions to be made which could harm a portfolio. Communication keeps things in the open, and keeps trust in the professional relationship.
Last but not least, we want to know that the broker we choose has a strong knowledge of the commodity sector we want to invest in. For example, he may be good in metals but not as strong in agriculture.
If you want to invest in agriculture, you obviously want someone that really follows and understands it.
You may want to do a little research on the sector if you aren't up on it, and ask some subtle questions or make comments to see how the broker responds.
Commodities as a sector are going to surge in the near and long term future. Demand is guaranteed, based on the growing needs and wants of millions of people growing into the middle class.
Those doing their homework well and preparing for this will do very well going forward.
Choosing the right commodity broker and brokerage is a major part of that success step for anyone's wealthbuilding strategy.