Commodity And Futures Trading - Why It Isn't For Brand New Stock Traders

If you don't mind losing $5000 in 10 minutes, you may take pleasure in trading commodity futures contracts. There is an old saying among commodity traders: "It's easy to make a small fortune in commodities. Just begin with a huge fortune!"

This really is not a business for people that are emotionally attached to their cash, yet a large number 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 that's available to commodity futures traders.

The commodity markets include things like wheat, corn, soybeans, pork-bellies, precious metal, silver, heating oil, lumber, and a lot of 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 known as "hedging." On the other side of that transaction will be the trader, who speculates on whether or not the price of the commodity will go up or down just before the contract is due for delivery. Simply because futures contracts might be purchased using leverage, these financial instruments lend themselves to speculation.

For example, control of a corn contract worth $5000 might only demand $500 of actual cash, or 10% of the face value of the contract. If the corn company’s market capital goes up in value, and the contract becomes worth, say, $5500, the speculator has made $500 on his or her original $500, for a 100% return.

You can very easily see why investors in search of rapid gains are hypnotized by the lure of huge earnings using maximum leverage in commodity futures trading. The real dilemma, however, is the fact that the leverage works in both directions.

You may lose your whole investment in a matter of minutes because of the wild price gyrations that sometimes happen in these volatile markets. Let's imagine the $5000 contract drops to $4000 in value as opposed to increasing.

You have not only lost the original $500 you put on 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 early morning and say to themselves, "Right, I think I'll start trading commodities."

What takes place is, they get a sales pitch from a commodity trading "guru" claiming to have a "system" for generating sure-fire earnings in these wild markets. These "systems" range in value from $25 all the way up to $5000 or more, and are sold based on the promise of "huge profits" from a small starting investment.

There is no sure-fire way to consistently earn money in these markets, simply because the underlying commodity prices can swing wildly back and forth depending on a complicated set of variables, many of which are totally unpredictable.

You will find also a handful of successful professional traders who make a living in these markets. However the vast majority of people who dabble in commodity futures lose funds.

Unfortunately, with the lure of big returns and easy capital, a fresh crop of innocent traders enter the market each year, only to be promptly fleeced out of their income.

Do not be one of them! Get professional help when raising capital in the stock market. You do not want to make an investment mistake and buy shell company stocks.