In order to start trading on the futures
markets, you must open an account with a Series 3 qualified commodity broker
representative. You may know of a friend who can recommend a futures brokerage to you, or
a broker may even call you themselves.
Types of brokerage firms from which you can
Full Service Brokerage
If you are new to futures trading, or if you
follow a wide number of markets, then you may be best to use the help of a full service
brokerage firm. Transaction fees are generally higher because of the extra services a full
brokerage service provides. For example, they will follow news articles on investments,
provide market data, and give you trading advice.
Your trading strategies will be a joint effort
between you and your broker. If you're new to futures trading you might feel more
comfortable with the extra attention that a full service brokerage provides.
If you have some experience futures trading,
you may be able to save money using a discount brokerage firm. A discount broker
simply takes your order and places it on the market for you. Trading advice, market data
or additional services may not be provided and you will make all the decisions yourself.
You need only call, place the order and the
firm will execute it. Support is limited, but if you feel that you don't need the added
support, this is the most economical way to trade.
Introducing Broker (IB)
An Introducing Broker is a full service
brokerage firm, which usually specializes in trading futures. An Introducing Broker's buy
and sell orders are executed on the commodity exchanges through a well-known, established
firm, which itself is a clearing member of the exchanges.
An Introducing Broker may not have such a
recognizable name, but the service and attention to your account will be equal to
that of a full service brokerage. You will probably be able to find an
Introducing Broker in your home town, which may be more convenient than an actual full
service brokerage in another location.
How to Select a
You should hope to retain a long-term
relationship with your broker, so it is important to find out as much as possible about
them and get to know them as much as you can.
Once you've located a broker in your area,
arrange an interview or appointment with him or her. Ask that he/she include references
and be sure to check them out prior to the meeting.
Explain your objectives to your broker such as
if you are hedging positions against the cash market, or if you are a speculator.
After choosing a broker to represent you, you
will be asked to provide a certain amount of personal and financial information and you
may need to read through a substantial amount of material. This is for your protection and
commodity laws require these statements.
Ask questions if you are unsure of anything
and read everything carefully before you sign on the dotted line.
Commodity Futures, Currencies,
You should make sure that your broker is
familiar with the markets that you want to invest in. For example, do you want to trade
currencies? Grain, Metal, Energy or Livestock commodities? Or stock market indices like
the S&P 500, Dow Jones and Nasdaq?
How much do you need to open a trading
As well as finding out how much you will need
to open an account to trade your chosen markets, you should also discuss the brokerage
firm's margin requirements and call procedures. Hedger's margins are less than speculators
because of the difference in risk.
What services does the
broker offer and what
are the commission fees?
Commission charges will usually vary depending
on the volume of trades. Also, ask if there are any extra fees involved.
How long has the brokerage firm been in
Thanks to the internet, there seems to be a
lot more brokerage firms around. Perhaps the amount of time a brokerage firm has been in
business and their relevancy of experience will be important to you?
You may also inquire as to the amount of
clients the broker deals with to ensure that you get the attention you are after.
And finally, you should also check out the
broker through the National Futures Association to find out if any disciplinary actions
have been taken against the firm or individual broker. Ask the broker about any actions
taken if necessary - they may not be as serious as you first thought.
Margin and margin calls
Margin is a "futures performance
bond". It is not partial payment for the futures contract, but a "good
faith" amount posted with the exchange to ensure performance in case the market moves
against you the next day.
Your maximum possible losses for the next
day's trading are usually held in advance. Both buyers and sellers in the market have to
put up margin and this gives added confidence to the market as both parties will be able
to take gains immediately, should the market move in their favour.
Should the market move against your position,
and your margin is used up, you may receive a "margin call" from your broker to
forward additional margin to your trading account.
Ask the broker about their margin