Trading is hard, even for grizzled veterans, so anyone looking to trade needs to do their due diligence, especially when selecting their broker.
In the world of electronic trading, traders can trade at very low rates depending on how much help they need. But new traders need to be honest with themselves in selecting a broker. You may not know as much as you think, so it is good to have someone to hold your hand even if it means paying a higher commission.
Once you have decided upon a firm, you should then decide on an individual broker. Here are 10 questions that a new futures trader or investor should ask when selecting a broker.
1. What type of registration do you have?
“We’ve seen in recent years a lot of fraudulent companies that are based overseas, out of the reach of the U.S. regulators, that have turned out to not be on the board,” says Phil Flynn, senior energy analyst at The PRICE Futures Group. When you talk to a broker, you want to find out if they are registered in the United States. If a potential broker is registered, they will be registered with the Commodity Futures Trading Commission (CFTC) after becoming a member of National Futures Exchange (NFA).
You should visit www.NFA.Futures.org to access their BASIC (Background Affiliation Status Information Center) database. The database contains CFTC registration and NFA membership information. In addition to registration status, be sure to look out for any disciplinary history. Make sure you examine the company’s history and age of business. Do they, or other brokers who work for that firm, have any disciplinary history you as a potential customer should know about?
2. Can we build a personal relationship?
When selecting a broker, remember that you are developing a long-term relationship. Make sure that person is somebody that you can get along with. Before you open an account with your broker, you need to know that you can work with him or her. See what type of research and experience the broker has to offer; how many years of experience he or she has and find out if the broker’s personality is one you can work with on a daily basis.
“It’s important to have an open relationship with your broker. You will appreciate a broker you can relate to and talk to on a regular basis,” Flynn says. There may be a large amount of material you are required to sign — don’t be afraid to ask questions. According to Heritage West Financial, Inc. you should carefully read and understand all material before signing anything. Never exaggerate your financial statistics such as net worth or the amount of risk capital you have. Certain trades and markets can be utilized relatively cheaply, but if you are undercapitalized for a particular strategy, it makes it nearly impossible to be successful in the long run.
Be very cautious and avoid brokers who suggest being less than truthful on your account forms. It is for your protection that commodity laws require these statements. If a broker encourages you to exaggerate to get an account open, that broker is likely churning accounts and not interested in your long-term success.