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What are Commodity Futures Brokers?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 06 February 2020
  • Copyright Protected:
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Commodity futures brokers are financial professionals who specialize in buying and selling commodity futures on behalf of clients. They may work for financial firms, some of which may focus exclusively on trading in commodities, or they may work as independent brokers. Like other brokers, commodity futures brokers operate on a commission, taking a cut of every trade they facilitate. Thus, it is in their best interest to execute the best trade possible on behalf of the client.

Commodity futures contracts are a type of derivative contract. Put simply, a commodity futures contract is an agreement to buy a commodity on a set date at a set price. The contract is set long before the commodity is available, with people being forced to estimate the market conditions which may appear months in the future. For example, someone buying a commodity futures contract for wheat might believe that the harvest is going to be meager, in which case wheat will sell for a high price, and buying up the supply of wheat in advance at a high price could be advantageous.

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These financial instruments are bought and sold like other types of financial securities. When someone buys a commodity futures contract, she or he is usually not actually committing to buy the commodity in the future, but is rather using the contract as a financial instrument. It's possible to make a great deal of money by making the right moves, but it is also possible to lose money by making bad choices.

Some commodity futures brokers work on the floor or “in the pit,” making trades with other people in an commodities exchange. Others may execute orders from afar, either sending orders to representatives in a pit, or working through software programs to manage a client's portfolio of commodity futures. Commodity investing can be very complicated, and these finance professionals need to keep track of a wide variety of incoming information, ranging from weather predictions to information about coups in foreign countries.

For people who are interested in commodity futures, but not experienced enough to become traders, working through a commodity futures broker can be a good option. Commodity futures brokers are experienced enough to make good choices on behalf of their clients, and some will also work with their clients to educate them, encouraging their clients to learn about the market. In order to open up an account, it is necessary to have some funds to deposit which will allow the broker to start trading on behalf of the client. Many commodity futures brokers will also extend some credit as needed.

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