Futures Trading - Why It's Not For New Stock Traders
If you do not mind losing $5000 in 10 minutes, you might take pleasure in trading commodity futures contracts. There is an old saying among commodity traders: "It's simple 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 funds, but a large number of average "investors" get lured into the commodity markets every single year. Why? Because of the possibility of making high percentage gains using the built-in leverage that is available to commodity futures traders.
The commodity markets involve wheat, corn, soybeans, pork-bellies, gold, silver, heating oil, lumber, and a lot of other common trade items. The large firms that operate within 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 price of the commodity will go up or down just before the contract is due for delivery. Since futures contracts might be purchased using leverage, these types of financial instruments lend themselves to speculation.
For example, control of a corn contract worth $5000 may only require $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 initial $500, for a 100% return.
You may very easily see why investors in search of rapid 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 whole investment in a matter of minutes as a result of the wild price gyrations that occasionally happen in these volatile markets. Let's say the $5000 contract drops to $4000 in value rather than 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 men and women play this game? Average investors don't wake up in the early morning and say to themselves, "Right, I think I'll begin 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 $5000 or more, and are sold according to the promise of "huge profits" from a small opening investment.
There is certainly 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 complex set of variables, many of which are completely unpredictable.
There are also a handful of successful skilled traders who make a living in these markets. However the vast majority of people that dabble in commodity futures lose funds.
Unfortunately, with the lure of huge returns and easy money, a fresh crop of innocent traders enter the market each year, only to be quickly 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 error and buy shell company stocks.
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