Opening an account to trade commodities is probably easier than you think, but it is a major undertaking, and you can expect to fill out some paperwork and wait a couple of days before you can begin trading commodities.
Choosing a Firm
When opening an account, the first thing to do is to decide on a commodity brokerage firm. The brokerage company will hold your account and execute your trades. There are many full-service brokers and discount online brokers to choose from. You have to determine the best fit based on your needs. A full-service broker will help by recommending trades, while you are on your own with an online futures broker.
It's recommended that you choose three commodity brokers to interview before you decide on one that best suits your needs. For online trading, thoroughly examine their online trading platforms before opening an account. Most brokers provide a demo of their trading platforms for prospective customers. Additionally, check all of the fees associated with an account. Types of fees can include platforms fees, commission rates, clearing fees, and any other account charges.
If you plan on going the full-service route, then the specific commodity broker you will be working with is a critical issue. Like in any business, some brokers are better than others. Most people rely on brokers to educate them on the markets or to make trading recommendations. If your broker is not a successful trader, you could lose your money very quickly. It is always important to pick a broker that you have chemistry with and one who offers the level of service you require.
Once you decide on your broker, the professional will provide you with account forms and disclosure documents to read, fill out, and sign. These forms are often available online, so you can get started with the paperwork immediately. Some brokers allow you to submit completed paperwork online, but you will probably need to mail a hard copy with your original signature. You will also be required to provide some form(s) of ID to verify that your identity matches the forms.
The forms will include questions on your financial condition such as your annual income and net worth. You will also be asked questions about your investment experience in equities, commodities, and options. Finally, you have to acknowledge that you have read and understood all of the risks involved in trading commodities. The agreement generally stipulates an understanding for arbitration to resolve any disputes. Arbitration tends to avoid high legal fees.
The process of opening an investment account requires an approval process. Trading commodity futures is risky for both you and the brokerage firm. A customer can lose more than the initial investment when trading futures contracts. Therefore, any broker will make sure any customer can pay if there is a deficit in the account. Additionally, brokers are required by regulators to make sure their customers are suited to trade commodities.
One does not have to prove that they are an expert trader; rather, the brokerage firm must make sure that the risk undertaken is within the bounds of financial capabilities. Your liquid net worth, age, income, credit rating, and trading experience will all be considered by the brokerage firm. Most people are approved to open a commodities account, but, in some cases, a brokerage firm can deny a customer an account.
The commodity broker will inform you that they have accepted your paperwork. It generally takes a couple of days before an account is approved. The brokerage firm will contact you if they need more information before they make a final decision. Once your account is approved, you will receive notification and information, like your account number and password, as well as additional instructions. You will be required to fund your account after receiving this information to begin trading. Wiring money is usually the quickest route. A cashier's check is also acceptable, but a personal check could take some time to clear, delaying the process before you can begin trading.