Explains commodity futures trading and the pitfalls of this kind of investment you won’t hear from the newsletter writers and “commodity trading gurus” on the investment channel.
Table of Contents
Commodity futures trading
If you don’t mind losing $5,000 in 10 minutes, you may enjoy commodity futures trading agreements. There’s an old phrase among commodity traders: “It’s easy to create a small fortune in commodities. Just start with a big fortune!” This is not a business for individuals who are emotionally attached to their money, yet thousands of average “investors” get drawn into the commodity markets year after year. Why? Because of the possibility of making high percentage earnings using the built-in leverage that is available to commodity futures trading.
How do you trade commodity futures?
The commodity futures trading markets include wheat, corn, soybeans, pork bellies, gold, silver, heating oil, lumber, and numerous other common trade items. The huge companies that function in these markets use commodity “futures” contracts to lock in their selling prices for the product in the advancement of delivery. This technique is called “hedging.” On the other side of that commerce is the trader, who assumes whether the price 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 mechanisms lend themselves to speculation.
For example, control of a grain contract worth $5,000 may only require $500 of genuine cash or 10% of the face value of the contract. If the grain goes up in value, and the contract becomes worth, say, $5,500, the wagerer has made $500 on his or her original $500, for a 100% return. Compare this with the common stock market, which limits leverage to 50%, so that $5,000 worth of stock needs a minimum of $2,500 of capital. If the stock goes up to $5,500 in buy, the $500 gain is against $2,500 invested, for a return of “only” 20%. The 100% return certain looks a lot better, right?
How Much You Earn?
You can efficiently 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 operates in BOTH DIRECTIONS. You can lose your total investment in a matter of minutes due to the rough price gyrations that sometimes appear in these volatile markets. Let’s say the $5,000 contract falls to $4,000 in value instead of increasing. You’ve not only lost the original $500 you put into the contract, but another $500. You can go broke fast on this path.
Also Read: Gold Investing for Profits
So why do individuals play this game? Intermediate investors do not wake up in the morning and say to themselves, “Right, I think I’ll start commodity futures trading.” What happens is, that they receive a sales pitch from a commodity futures trading “guru” claiming to have a “system” for generating sure-fire profits in these rough markets. These “systems” range in price from $25 all the course up to $5,000 or more, and are sold based on the promise of “huge profits” from a small initial investment.
Newsletter writers or commodity futures trading gurus or commodity trading channels regularly pitch the myth about turning $5,000 into a million bucks in less than a year. The specific commodity system pitch comes in a long sales letter or booklet that represents a method for winning on “9 out of 10” trades or similar inflated claims.
Also Read: Emotion In Investing – How Much Important?
Is trading futures gambling?
Of course, if it was feasible to correctly trade 90% of the time, an individual could easily amass millions of dollars in a very short period of time. So why are these guys so keen for you to spend $195 on their super-duper commodity futures trading course? Because they presumably 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 conveying into commodity futures trading.
There is no sure-fire path to consistently making money in these markets, simply because the underlying commodity prices can swing significantly back and forth depending on a complex set of variables, many of which are totally unpredictable. That’s why the only individuals consistently making money in the commodity futures trading markets are the brokers, who collect a commission for conducting the trade regardless of whether it wins or loses.
Conclusion
There are also a handful of successful experienced traders who make a living in these markets. But the extended 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 commodity futures trading market each year, only to be fast fleeced out of their money.
Don’t be one of that traders! Leave commodity futures trading to the professionals and stick with the more tedious forms of investment, such as mutual fund investing or stocks and bonds.