4 Ways Commodity Brokers Can Screw Up

Commodity brokers do not have to miss the mark by much to truly screw up a transaction. The commodities market is often unpredictable, which is part of why there is so much money to be made on effective trades. The less predictable an event, the more likely you are to make money off of betting on that event. While this is the nature of the commodities market, it also means a broker will make bad choices on multiple occasions in a lengthy career.

#1 Engaging in Groupthink

The commodities market is subject to bubbles and crashes. This market may be even more susceptible to speculation than the stock market because of the way speculation can fuel profits on futures and options contracts. While a little bit of speculation is part of the game, too much speculation can falsely affect the market, making it inefficient. Commodities brokers are often guilty of groupthink, which is a word used to describe the mob effect in terms of investing. If a number of brokers are hot on a certain commodity at a given time, another broker may jump on board, and this can cause false bubbles.

#2 Being too Active

Commodities trading can follow two methods: one, slow and steady investments for long-term growth and, two, quick and frequent trades for short-term wealth. Commodities brokers are often too focused on the latter model. The short-term wealth provided by a good deal can generate more business for the broker. This leads the broker to be constantly seeking fast results, even if the investor she is directing may be more interested in long-term profit. Being too active, advising clients to switch traders, jump from fund-to-fund or otherwise hop around the market can also lead to higher sales fees and transaction fees. Passive brokers may be more profitable.

#3 Depending on Calculations

Commodities trading is a lot about math. Perhaps more than any other market, the commodities market relies on calculations and comparisons to a benchmark. The reason is there is less "talent" factoring into the commodities market. The success of corn this year depends more on weather, which is measurable, than it does on the talent of a particular farm's CEO, which is harder to measure. Holding stock in that farm would rely on this softer analysis. Depending too much on the math, though, can lead brokers to make decisions that may be too narrow-minded, ignoring larger trends to concentrate on smaller ratios.

#4 Not Listening to Clients

Brokers do not have to listen to clients while they are making money. This is one of the interesting features of the job; if the deals are successful, few clients will complain. However, even with the best broker, a deal will go wrong from time to time, and then clients will begin to look a little closer at their investments. If a broker has failed to listen to client requests, the client can quickly discover that she is engaged in far riskier investments than she believed. Commodities brokers who fail to truly listen to the goals of their clients can get carried away chasing profits.

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