A commodity broker is similar to a stockbroker, but rather than trading in bonds and stocks, he deals exclusively in commodity futures. In the past, commodity brokers traded only in grain or livestock, but today they may deal in many other industries, such as stock indexes and currencies. But instead of trading the actual product, he trades in what are referred to as derivatives so the buyer doesn't take possession of the actual products in which he takes a position. While there are close to 750,000 stockbrokers in the United States, there are fewer than 60,000 commodity brokers because of the complexities of the business. There are different kinds of commodity brokers, and what they specialize in will determine your choice of which broker to use.
Full Service vs. Discount
There are two types of commodity brokers--one that provides full service and charges fees to cover that benefit, and the other, called a discount commodity broker, because they will give you less, or no, guidance but charge significantly less commission on each transaction. If you are new to the art of trading commodities, you would be better off in the hands of a full-service broker who will provide you advice, and even help you develop a strategy based on your financial situation. When you have been at the commodity business for awhile, and you begin feeling comfortable, you might do well to switch to a discount commodity broker and rely more on your own instincts and research while saving considerable money in commissions.
A Commodity Broker's Experience
If you are just getting started in commodities investing, it is especially important for you to find a commodity broker who has extensive knowledge and experience. You have chosen this form of investing because you want to make money, so a broker with little or no experience will be less able to guide your through this rather complicated area. Look for a broker who has a few years of experience in trading commodities because he will be critical to your success.
Support Is Critical
Many successful commodity brokers have developed a clientele base that contains some very large investors. In such a case they will tend to pay more attention to them than those with smaller portfolios because of former's higher commissions. If you are just a beginner, and have invested only a small part of your investment funds in commodities, look for a commodities broker that is savvy about the market but has yet to build a significant following. All things being equal, it is better to have a commodity broker who is willing to grow as a result of your success and that of other small investors.
Consider "Test Driving" a Commodity Broker
Because most commodity investors are in it for the long haul, a lot of commodity brokers will allow you to try them for a brief period of time. That will give you the opportunity to see the depth of his research and service. More importantly, though, is that it will enable you to determine the chemistry between you and the broker.
Choose Wisely
If you have chosen a full-service commodity broker and you obviously rely on her advice, continually challenge her investment decisions, because you will only make money if she is right. Also, that will help you learn about commodity trading more quickly in the event that you later choose to go with a discount commodity broker.
