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 THE ABC OF... |
The ABC of comparing futures brokers
If there's ever a moment to think long and hard about your tool of trade and choice of broker, it's now. Futures trading is one of the more risky and complicated markets to trade, so if you're still struggling with those Telstra shares then scat. You're not ready to be trading futures.
For those not in the know, futures contracts in Australia are traded on the aptly named Sydney Futures Exchange. Put simply, a futures contract is an obligation to buy or sell a certain underlying instrument - such as wool, cattle or the 90-day Australian bank bill - at a specified price (labelled the futures price) at a certain future date. This date is called the delivery or final settlement date.
While importers and exporters deal in futures for "real" business matters and as a form of hedging - there are another tranche of people who never envisage fulfilling the contract on the settlement date, and for good reason. Do you really want a herd of prime cattle delivered to your home office? We think not. This latter group - who never take actual delivery of the underlying commodity - are called speculators, day-traders, futures traders, and so on.
Many speculative traders exit a futures contract before settlement date, by either selling a long position or buying back a short position.
Our list of brokers only includes those who deal for private traders. Not all futures brokers do, so don't get caught perving at the wrong broker. Instead, use our futures brokers tables for a full list.
A. Types of brokers
You have a choice of using a full-service or discount broker.
Do you want your broker to simply get good fills for you and execute your trade? Or do you want them offering their two cents worth on the trade you're about to undertake?
Full-service brokers are pricier but are especially helpful if you're a newcomer to futures trading. These guys will pile you up with the firm's research, trading recommendations, and contact you with timely advice on investments. It's easy to get confused by futures terminology and trading concepts, and full-service stockbrokers can be utilised as an educational springboard in futures trading.
Discount brokers are generally a better bet for traders who know that they are doing, and want simple execution with a smile. A discount broker is hands-off when it comes to making decisions about how to trade your account - and for this reason they are the economical choice. For those with decisive trading plans and methodology, you probably don't want the advice of a broker interfering in your decision-making.
Regardless of whether you choose a discount or full-service broker, it's worth emphasising that your trading decisions on futures - or on any product for that matter - are yours alone. Newcomers beware: Don't get coaxed into a trade by an aggressive broker, and don't blame your broker if the trade goes sour. Always take responsibility for your actions. Remember it's your money at stake.
B. Minimum account balance & margin
Before you can start trading you have to place funds with a broker. Some brokers will allow you to start trading with $10,000 - others want more than $25,000. Check out our comparison table for more details.
As well as the initial deposit, you will need enough money to cover the initial margin of the first futures contact you intend to buy or sell. The margin is not the full investment, but rather the deposit - typically 5 to 10 per cent of the value of the contract. This margin simply reduces the credit risk to the exchange and is based on an estimate of the maximum price move possibly by the futures contract over one day.
C. Brokerage
Brokerage on futures contracts is generally less than share trading.
Futures brokers may charge you a flat fee every time you separately enter and exit a trade - or "per side" - or for both entering and exiting a trade, otherwise known as a "round turn". Some may charge a percentage of the gross value of the trade, while others might offer a combination of the above. See our tables for the lowdown on broker commissions.
D. Data
The type of data you require will mostly depend on how regularly you trade. Clearly, day traders will require more up-to-the minute data than those who trade with a longer time frame in mind.
Brokers offer live, delayed and/or historical price data on a broad range of markets. Historical data is particularly handy if your trading is longer term, and is highly recommended for back testing dummy trades before you launch into the real thing.
E. Trading system
Trading systems offered are either software or Internet based. Internet-based systems are more convenient for those on the move, who like the flexibility to trade wherever and whenever - since you just log onto your account via the Internet.
Software-based systems are perfectly suitable for those with laptops, or for traders who intend to trade from, say their home office everyday.
F. Markets offered
The Sydney Futures Exchange (SFE) offers trading across four different products - interest rates, equities, electricity and commodities.
Don't forget to check out our comparison tables to find a broker, starting with our Featured Providers.
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