Commodity Futures Trading - Why It's Not For Average Investors,
or How to Lose Money Quickly Without
If you don't mind losing $5,000 in 10 minutes, you may enjoy
trading commodity futures contracts. There's an old saying among
commodity traders: "It's easy to make a small fortune in
commodities. Just start with a large fortune!" This is not a
business for people who are emotionally attached to their money,
yet thousands of average "investors" get lured into the
commodity markets year after year. Why? Because of the
possibility of making high percentage gains using the built-in
leverage available to commodity futures traders.
The commodity markets include wheat, corn, soybeans,
pork-bellies, gold, silver, heating oil, lumber, and numerous
other common trade items. The huge companies that operate in
these markets use commodity "futures" contracts to lock in their
selling prices for the product in advance of delivery. This
practice is called "hedging."
On the other side of that transaction is the trader, who
speculates on whether the priced of the commodity will go up or
down before the contract is due for delivery. Because futures
contracts may be purchased using leverage, these financial
instruments lend themselves to speculation.
For example, control of a corn contract worth $5,000 may only
require $500 of actual cash, or 10% of the face value of the
contract. If the corn goes up in value, and the contract becomes
worth, say, $5,500, the speculator has made $500 on his or her
original $500, for a 100% return. Compare this with the regular
stock market, which limits leverage to 50%, so that $5,000 worth
of stock requires a minimum of $2,500 of capital. If the stock
goes up to $5,500 in value, the $500 gain is against $2,500
invested, for a return of "only" 20%. The 100% return sure looks
a lot better, right?
You can easily see why investors in search of quick gains are
hypnotized by the lure of big profits using maximum leverage in
commodity futures trading. The real problem, however, is that
the leverage works in BOTH DIRECTIONS. You can lose your entire
investment in a matter of minutes due to the wild price
gyrations that sometimes occur in these volatile markets. Let's
say the $5,000 contract drops to $4,000 in value instead of
increasing. You've not only lost the original $500 you put into
the contract, but an additional $500. You can go broke quickly
this way.
So why do people play this game? Average investors don't wake up
in the morning and say to themselves, "Right, I think I'll start
trading commodities." What happens is, they receive a sales
pitch from a commodity trading "guru" claiming to have a
"system" for generating sure-fire profits in these wild markets.
These "systems" range in price from $25 all the way up to $5,000
or more, and are sold based on the promise of "huge profits"
from a small starting investment.
Newsletter writers or commodity gurus regularly pitch the myth
about turning $5,000 into a million bucks in less than a year.
The typical commodity system pitch comes in a long sales letter
or booklet that describes a method for winning on "9 out of 10"
trades or similar inflated claims. Of course, if it was possible
to correctly trade 90% of the time, a person could easily amass
millions of dollars in a very short period of time.
So why are these guys so eager for you to spend $195 on their
super-duper trading course? Because they probably aren't making
any real money with their own trading program! There's much
safer money to be made selling others on the idea of getting
into commodity futures trading.
There is no sure-fire way to consistently make money in these
markets, simply because the underlying commodity prices can
swing wildly back and forth depending on a complex set of
variables, many of which are totally unpredictable. That's why
the only people consistently making money in the commodity
markets are the brokers, who collect a commission for executing
the trade regardless of whether it wins or loses. There are also
a handful of successful professional traders who make a living
in these markets. But the vast majority of people who dabble in
commodity futures lose money.
Unfortunately, with the lure of huge returns and easy money, a
fresh crop of innocent traders enters the market each year, only
to be quickly fleeced out of their money. Don't be one of them!
Leave commodity futures trading to the professionals and stick
with the more boring forms of investment, such as mutual fund
investing or stocks and bonds.