Market side: Futures trading basics

This monthly educational series will feature the basic workings of the futures and options markets and how they can be utilized to help farmers with risk management.

FOR THOSE OF you who wish to open a trading account, there are several questions you should consider. To begin with, you need to determine whether you require a personal account or a proper hedge account. A proper hedge account would be opened in the name of your Canada Revenue Agency (CRA) filing and any profits or losses shown would be reflective of the business income. If, however, you were to open an account in your personal name without any ties to your farm account, the profits or losses would be treated as individual and you could be liable for taxes on any profits or you may not be allowed to claim losses against the farm income.

Once you have determined the proper type of brokerage account, you will need to decide whether you want a broker-assisted account or go it alone with a discount online brokerage. I would strongly recommend that you use the broker-assisted setup until you are comfortable with trading. They may save you a lot of grief with order entry mistakes if you are new to trading. The technical language is important when entering orders and if you make a mistake, you are responsible for any losses incurred. If you use a broker-assisted account, there is a good chance they will recognize your error and correct it before you enter your order.

If you decide to use the broker-assisted account, you will need to find a broker that you can work with. I would recommend finding one that has been referred by someone you know who can vouch for the quality and dependability of their services. The next step would be to arrange a meeting with the broker to discuss your needs and expectations. It is important to discuss commissions, types of accounts, margin calls, trading advice, and your needs regarding your hedging requirements.  Because most brokers work on commission, you need to be aware that many will offer free trading advice and encouragement to trade your account. My advice to you is to use the broker as an assistant for the purpose of executing orders and to prevent you from order entry errors. I would suggest that you not use them for trading advice.  Brokers don’t know any more than you know with regard to future prices but they are valuable when it comes to learning how to properly enter a trade.

It is important to use a Canadian brokerage firm that is associated with the Canadian Investment Protection Fund (CIPF). Money deposited with these firms is guaranteed up to one million dollars per individual account. Exchanges outside of Canada do not insure your funds. •

Marty Hibbs is a 25 year veteran futures trader, analyst, and portfolio manager. Hibbs was a regular guest analyst on BNN for four years. He is currently a grain merchandiser with Grain Farmers of Ontario.

Lesson Definitions: Canadian Investment Protection Fund: CIPF members are dealer members of the Investment Industry Regulatory Organization of Canada (IIROC).  In the unlikely event that the member you are dealing with becomes insolvent, CIPF will ensure the securities, cash, and other property that are held in your account are returned to you in accordance with their coverage policy.  www.cipf.ca Full service account: Generally regarded as high-end brokerage services, they can charge from $50-$150 per contract. Broker assisted account: The brokers who operate these accounts are more akin to customer services representatives. They assist you in the execution of an order. Their average commission is $25-$50 per contract. Discount brokerage: The least expensive brokers, generally online or do-it-yourself. This is an excellent choice if you want to do a lot of trading once you have become familiar with placing orders. Trades can be completed for as low at $5 per contract.