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 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.
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 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.
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, Stock market Indices?
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 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?
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 requirements.