Opening an Account with a Commodity Broker - dummies

Opening an Account with a Commodity Broker

To start trading exchange-traded products, you have to open a trading account with a commodity broker who’s licensed to conduct business on behalf of clients at the exchange.

The technical term for a commodity broker is a futures commission merchant (FCM). The FCM is licensed to solicit and execute commodity orders and accept payments for this service.

Before choosing a commodity broker who will handle your account, perform a thorough and comprehensive analysis of its trading platform. You want to get as much information as possible about the firm and its activities. A few things you should consider are firm history, firm clients, licensing information, trading platform, regulatory data, and employee information.

After you select a commodity brokerage firm you’re comfortable with, it’s time to open an account and start trading! You can choose from a number of different brokerage accounts. Most firms will offer you at least two types of accounts, depending on the level of control you want to exercise over the account:

  • Self-directed accounts: If you feel confident about your trading abilities, have a good understanding of market fundamentals, and want to get direct access to commodity exchange products, then a self-directed account is for you. In this type of account, also known as a non-discretionary individual account, you call the shots and make all the trading decisions.

    Before you open a self-directed account, talk to a few commodity brokers because each firm offers different account features. Specifically, ask about any minimum capital requirements the firm has (some commodity brokers require that you invest a minimum amount of $10,000 or more), account maintenance fees, and the commission scale the firm uses.

  • Managed accounts: In a managed account, you’re essentially transferring the responsibility of making all buying and selling decisions over to a trained professional. This type of account is ideal if you don’t follow the markets on a regular (daily) basis, are unsure about which trading strategy will maximize your returns, or simply don’t have the time to manage a personal account.

    Before you open a managed account, first determine your investment goals, time horizon, and risk tolerance, and find a commodity trading advisor (CTA) who will manage your account based on your personal risk profile. Before contracting with anyone, however, find out about any minimum capital requirements, commissions, or management fees you may face.