Maybe you have heard that commodities are a good investment and you want to hire a commodity broker to handle your trading account. However, being new to the commodities markets, you might not know what to expect from your commodity broker.
Three Kinds of Clients for Commodity Brokers
Throughout my career as a commodity broker, I noticed there are typically three types of clients.Client A: An investor who is looking to diversify his investments and put about 5-10% into commodities. He is seeking above average returns from commodities and uses a full-service commodity broker to manage his account.
Client B: Someone who has been studying the commodity markets and would like to learn everything he can. He will utilize a broker for guidance and a market education. One day he hopes to trade on his own and possibly make a living from commodity trading.
Client C: Here is a client who likes to roll the dice. He expects to make a killing in the markets and no risk is too great. Anything short of a triple digit gain will be a disappointment.
Expectations of Broker
Client A should expect a thorough trading plan from his commodity broker that covers markets traded, money management strategy and a trading strategy. He also contacts you for a regular update on the progress of your account. I always found this the most desirable type of client.Client B should expect a lot of hand-holding, patience and teaching from a broker. Your goal as this type of client is to learn about the markets and gain as much experience and knowledge as possible from your commodity broker.
Client C should expect a call from his commodity broker when the opportunity for a big move presents itself. You might want to take positions in a market before a major report or maybe you want to bet everything on one market--hoping for a big move.
The Reality of Commodity Brokers
Client A will probably get a brief rundown on how the commodity broker likes to trade, but you probably will not get any formal trading plan. Commodity brokers are also notorious for not keeping in contact unless they need your permission to execute a trade. You may have to call your broker to get an update.Client B will most likely get educated on the markets from his commodity broker provided that the broker knows what he is doing. If you seldom make trades and take up a lot of the brokers time, chances are your broker will be taking your calls less often. Brokers are paid on commission and they need to earn a living. Some brokers have the time and desire to help, while others do not have the time nor the desire.
Client C usually goes down in flames. Swinging for the fences leads to some really exciting times, but it often leads to account annihilation. You are only going to be right so many times before the odds catch up to you. Expect a call from your broker if you hit it big and bet that your broker will be looking for the next opportunity. If you lose, an unscrupulous broker will probably ask you to send more money for the next hot market.
The Middle Ground with Commodity Brokers
There are good and bad brokers just like in every other industry. I am sure the main concern with commodity investors is making money. If your commodity broker is doing a good job in that department, you can be a little lenient with other issues.Making money for clients should be the main goal of a commodity broker. Remember that brokers get paid a commission on every trade you make. So, he has to conduct a delicate balance between making you money and making money for himself.
You should have a gut feeling after a couple months on how well things are going. If your broker does not contact you for updates and your account is going downhill, you might want to slow things down. It is true that there will be wild swings in your equity with trading commodities, but you shouldn’t be down more than 30% after a couple months unless you wanted to take a lot of risk.
Commodities are different than stocks in the sense that you are regularly trading in and out of commodities. With stocks, you can use a buy and hold strategy on a group of fairly reliable stocks. Therefore, finding a good commodity broker is crucial to your success and meeting your expectations if you will not be making the trading decisions. Not all commodity brokers make money for their clients and live up to their expectations, so you have to use some good judgment until you find one who does.
