Finance April 18, 2016 Last updated January 11th, 2022 1,828 Reads share

Things To Consider Before Investing Money With A Commodity Broker

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There is enough risk involved in today’s trading markets without having to fear that invested funds could simply disappear. So how does a trader really know if their money is safe? With the collapse of both MF Global and PFG Best, it is certain there are no guarantees. Due to the unscrupulous practices of both of these companies, the industry has definitely suffered a blow. What can be certain is that finding the answer lies in the gathering of information. How about a look at some risk assessment data before investing money with a commodity broker:

  1. According to the CFTC, fraud in the futures trading market has been represented by less than 1% of the total sum of the around 6,000 registered commodity trading pools.
  2. Historically, around 41% of traders who regularly take positions in the market see positive net gains, while 95% of one-time traders suffer a loss. The key is to remain consistent with adjusted contract positions and turn calculated minimal losses into sizable gains.
  3. It is statistically true that the commodity futures market operates on the foundation of the movement of assets, therefore without market participants, the paradigm simply wouldn’t work. While there is a risk of loss with these investments, it is also true that based upon the fluidity of commodities trading, aside from the risk of fraud, there are also gains hidden within the millions of transactions moving on a daily basis.

When a trader commits investment funds to an account with Commodities Trading Brokers, those funds are entrusted with government registered and regulated agencies that hold the assets in customer segregated accounts. The more regulatory oversight a firm is subjected to, the more likely investor money is held in safe keeping. With a recent switch to an electronic verification system overseeing all transactions, the NFA and CFTC can now better identify fraudulent activity.

The vast majority of Commodities Trading Brokers are honest professionals serving the markets they facilitate. Thorough research into a possible firm through regulators such as the NFA or CFTC can greatly minimize the opportunity for an investor’s assets to wind up in the wrong hands. One way investors can set themselves a safe position in the futures market is to only invest what is needed on margin with a little cushion for margin calls during trading hours.

Some investors who have found themselves on the receiving end of fraudulent trading practices in times past have entrusted large amounts of capital to a firm while only actively trading a small portion of that capital at any given time. As a result, when the firm was uncovered and collapsed the entire amount of entrusted assets were lost, not just the actively invested amount. Obviously, for some investors, this was a costly mistake and in some cases has completely depleted a person’s life savings or retirement fund.

There are some key points to research when searching for trustworthy Futures Commodity Brokers:

  • Be very wary of investment opportunities presented as ‘get rich quick’ schemes
  • Do not get involved with firms or brokers who make prediction statements
  • Verify a firm or broker’s trading record and ask for their professional portfolio
  • Exclude any firm or broker that is willing to emphasize a little or no-risk service
  • Never send money to anyone requiring the funds be wired or transferred immediately before discussing the risks involved in commodities trading.

Avoiding the following mistakes in commodity trading can be your ticket to success to become a successful trader.

  • Over-leveraging: This is perhaps the most common issue when we talk about commodity trading. Almost, every small trader falls prey to this while venturing into commodities. There is massive leverage while doing futures commodity trading, hence, a couple of bad trades can wipe out the over-leveraged trader.
  • Commodity Trading Plan: You need to have a plan while doing commodity trading. Commodity trading is a volatile market sector, with the help of efficient planning, you can control your trading and benefit from it.
  • Money management: This is another big mistake traders make while investing. They risk more than a small percentage on any given trade. Statistics show that most of the professional money managers risk less than 2 percent on any particular trade. This gets tougher while trading commodities and other futures contracts. For instance, with just a $10,00 account, you should risk not more than $500 on a trade.

The chief reason why commodities are considered to be risky, is that commodities are traded in futures contracts and are highly leveraged. A commodity trader usually puts up only 5 to 20 percent of the contract in futures margin value in order to control the commodity investment.

Keep in mind that the relationship between a Futures Broker and their client should always be the role of a trading facilitator. Brokers in this sense are therefore accurately identified as representatives of their clients’ wishes. A client should be able to foster an evolving relationship with a good broker that serves their trading goals and needs. The already high level of risk involved in investments and trades should not be underscored by the dishonest and selfish practices of entrusted professionals.

Due to the purpose the futures market serves, which for some is to hedge against losses on their commodities and for others to strategically capitalize on market price fluctuations, it is safe to say that an investor can be confident in the functionality of the futures trading platform. Once the appropriate research is conducted and productive, transparent relationships are developed, investors and commodities brokers can obtain lasting partnerships that serve the commonwealth.

Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

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Ilan Levy-Mayer

Ilan Levy-Mayer

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