What is a Commodity Trading Broker?
A commodity trading broker is an intermediary who buys and sells on the commodity exchanges on behalf of someone wishing to invest in these markets. A commodity exchange is a market where raw materials and primary products are bought and sold. Some standard stock market brokerage firms do not deal in commodities, so to engage a commodity trading broker it is sometimes necessary to locate a firm that specializes in these types of investments. These types of stockbrokerage firms are sometimes called Introducing Brokers, or IBs.
In commodity investing, there are two main types of commodity trade available: spot trading and commodity futures. Spot trading normally occurs in wholesale markets when the commodity being traded is bought and delivered immediately, or with the minimum possible time lag. This form of trading is usually used by commercial entities and is not usually the method of trading used by a commodity trading broker. Brokers usually use commodity futures in order to trade in commodities on behalf of the investors for whom they are acting.
When an investor hires a commodity trading broker to trade on commodities on his or her behalf, the broker charges commissions on each trade. It is important to fully understand how the commissions are calculated in order to have the best chance of completing profitable investment transactions on the commodity exchange markets. The term round-turn rate is one to be aware of, as it refers to a commission structure where the given rate pays for both the buy and the sell aspects of the transaction.
There are alternatives to hiring a full commodity trading brokerage service, for investors wishing to trade on the commodity exchanges. These alternatives are typically online services where an investor can perform commodity option trades via a standard online brokerage service. In this form of brokerage, the investor typically receives no advice and pays lower brokerage fees.
The main advantage of hiring a commodity trading broker is usually the provision of advice on recommended trades available that are expected to be profitable. Commodity trading brokers typically perform a large amount of research on the available commodity markets, so they may be able to recommend investment opportunities that an individual investor would not otherwise spot. For investors who are new to the commodities markets, a commodity trading broker may significantly accelerate the investor's learning curve, and help a new investor to avoid many common beginners' mistakes.
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