5 Key Questions to Ask A Commodities Broker (Before Investing Your Money)

Futures trading in the commodities markets can be an effective component of an investment strategy. It’s attractive to speculators because futures prices tend to move more rapidly than stock or real estate prices, offering potential for greater gains within a given time frame. However, risk is inextricably linked to reward in every investment venue, boosting the potential for loss as well. One reason to hire a commodities broker is to gain a clear understanding of the balance of risk and reward in the commodities markets, as it relates to your own risk tolerance. Another reason is to help with the day to day trading decisions. While a buy and hold strategy may be effective in managing a portfolio of blue-blood stocks, speculating in commodities involves moving in and out of positions relatively frequently.

Whether you are an investor/speculator or a hedger (hedgers are companies or individuals, often those who deal in the underlying commodities, who use futures to protect their profits from adverse price movements), one of the most important decisions you’ll face in navigating the world of commodities and futures will be who to choose as your guide. Remember that you are establishing a long-term relationship that will impact your bottom line, and take the time to do some research. The key questions below can help you start a dialogue with a prospective broker and ultimately make an informed and confident decision.

1. What is your experience as a broker?
Optimally, you want a broker with a solid base of experience—ask about length of career, prior employers, dollar amount of client assets managed.

2. In addition to your customer service (sales) experience, how much ‘back-room’ (i.e.,  research, analysis, & portfolio management) experience do you have?
You don’t want a broker who only knows how to sell; you want a broker who knows how to trade. And ideally you want a broker who is passionate about trading, so listen for knowledge and enthusiasm.

3. Do you specialize in commodities and futures?
These are not stocks. You don’t want a stock broker who dabbles in commodities just to get the fees. You want someone who knows this market well. A broker with a specialization in commodities and also a broad base of experience in more traditional investment options can offer a holistic view of the futures market as a component of a comprehensive long-term investment strategy.

4. What licenses do you hold?
A Series 7 license is the stock broker license. A “Series 3” is a commodities broker license. The Financial Industry Regulatory Authority (FINRA) also issues other licenses that qualify industry professionals for specific roles. Most experienced professionals will have several of these.

5. What is your trading strategy?
This is a bit of a tricky question. Although your prospective broker may have an overall strategic philosophy, the strategy he advises for you should always be specific to your needs, initial capitalization, risk tolerance, the amount of leverage you wish to exercise, etc. See our article on “The 5 Key Questions Commodities Brokers Should Ask You.

You should receive clear and thorough answers to your questions. If your prospective broker is too focused on making a quick sale to slow down and have a meaningful conversation, you may want to look elsewhere. You should feel that you can build a rapport with this person and that he or she will be responsive to your concerns and genuinely interested in your success.