Commodity Brokers

On Commodity Brokers & Futures Trading

Commodities trading is another term used for trading on future markets or futures for short. Commodities are actually goods such as corn, gold, soybeans, coffee and pork bellies. When an investor trades in futures, he or she is technically trying to predict the future in order to make a profit. Here is an example of how a commodities trade would work:

Post is a cereal manufacturer who needs corn to make its product. Typically, Post would buy a commodities contract from a farmer who needs to sell his corn in order to make his money back for growing the commodity. The contract expiration date would be set somewhere in the future, hence the name “futures contract” and the farmer would then sell his corn to Post at the contract price when the contract came due.

Now, a speculator, or futures investor, will attempt to make money by buying a contract for the corn from the farmer and attempting to sell it to Post as the price of corn increases. Because the contract can be bought or sold at any time during the contract term, the speculator can choose to sell quickly if the market moves favorably or can hold the contract until later in the term.

There are three different players when it comes to commodities trading. They are:

• Commercials. These are the farmers and the end users of the commodities being traded and make up the largest population of commodities traders.
• Small Speculators. Individual investors who make their own trades through a commodities broker.
• Large Speculators. Groups of investors who pool their money together in an attempt to maximize gains and minimize losses. Just like with mutual funds, large speculators have money managers that make decisions for the group as a whole.

Commodities brokers are different from stock brokers and many stock brokers are not licensed to buy or sell commodities. If you live in Chicago, New York, California, or Florida you might have the ability to find a local commodities broker, however investors in other areas may have to look online for a broker.

It is important that you look at a few key areas of a broker before you choose to allow him or her to trade on your behalf. Here are a few tips on finding a commodities broker:

• Reputation. Before you hire a commodities broker, make sure that his firm lives up to the claims they make on their website or in their ads. One way to do this is to look through well respected financial publications such as SmartMoney, Barron’s and Kiplinger. Also look through the Better Business Bureau or other ratings boards to see if the broker has had any negative claims.
• Commissions. Look for brokers with reasonable commission rates. More expensive brokers aren’t necessarily better, but as with anything, you’ll most likely get what you pay for, so analyze the level of service you get for the cost of your trades.
• Educational opportunities. Many brokers offer a plethora of educational materials aimed at getting you up to speed on the ins and outs of commodities trading. Take advantage of these opportunities. Not only will they make you a better trader, but they will also clue you in if your broker is doing something that you don’t agree with.

Other articles on this topic:

• How To Invest In Oil ETFs
• Gold ETF Investing Options For Your Money
• Try Investing In Gold To Diversify Assets
• How To Invest In Commodities as an Average Investor
• Commodity Market Index: An Inflation Indicator