Futures: How to
choose a Futures Broker
At the time you
apply to establish a futures trading account, you can expect to be asked for
certain information beyond simply your name, address and phone number. The
requested information will generally include (but not necessarily be limited to)
your income, net worth, what previous investment or futures trading experience
and you may need to read through a substantial amount of material. This is for
your protection and commodity laws require these statements. At a minimum, the
person or firm who will handle your account is required to provide you with risk
disclosure documents or statements specified by the CFTC and obtain written
acknowledgment that you have received and understood them.
Opening a futures account is a serious
decision--no less so than making any major financial investment--and should
obviously be approached as such. Just as you wouldn't consider buying a car or a
house without carefully reading and understanding the terms of the contract,
neither should you establish a trading account without first reading and
understanding the Account Agreement and all other documents supplied by your
broker. It is in your interest and the firm's interest that you dearly know your
rights and obligations as well as the rights and obligations of the firm with
which you are dealing before you enter into any futures transaction. If you have
questions about exactly what any provisions of the Agreement mean, don't
hesitate to ask. Nor should you be hesitant to ask, in advance, what services
you will be getting for the trading commissions the firm charges. Not all firms
offer identical services and not all clients have identical needs. If it is
important to you, for example, you might inquire about the firm's research
capability, and whatever reports it makes available to clients. Other subjects
of inquiry could be how transaction and statement information will be provided,
and how your orders will be handled and executed.
In order to start trading on the futures markets,
you must open an account with a Series 3 qualified commodity broker
representative.
Types of brokerage firms from which you can choose include:
-
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.
-
Discount Brokerage - 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.
Selecting a broker:
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. You need to ask a few questions when looking for the right
broker for you.
-
Do you trade in Commodity Futures,
Currencies, and Stockmarket Indices?
You should make sure that your broker is familar 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
account?
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
business?
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?
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.
Next==>>
How to get involved
in Futures
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