Commodity Futures Trading - Why It's Not For Brand New Traders
If you do not mind losing $5000 in 10 minutes, you may enjoy trading commodity futures contracts. There is an old saying among commodity traders: "It's effortless to make a small fortune in commodities. Just start with a huge fortune!"
This is not a business for people that are emotionally attached to their funds, yet thousands of average "investors" get lured into the commodity markets time and time again. Why? Because of the possibility of making high percentage profits using the built-in leverage that is readily available to commodity futures traders.
The commodity markets include wheat, corn, soybeans, pork-bellies, precious metal, silver, heating oil, lumber, and several other common trade items. The huge companies that operate within these markets use commodity "futures" contracts to lock in their selling prices for the item in advance of delivery.
This practice is called "hedging." On the other side of that transaction will be the trader, who speculates on whether the value of the commodity will go up or down just before the contract is due for delivery. Because futures contracts may be purchased using leverage, these types of financial instruments lend themselves to speculation.
For example, control of a corn contract worth $5000 might only require $500 of actual cash, or 10% of the value of the contract. If the corn company's market capital goes up in value, and the contract becomes worth, say, $5500, the investor has made $500 on his or her initial $500, for a 100% return.
You can easily see why investors in search of swift gains are hypnotized by the lure of big earnings using maximum leverage in commodity futures trading. The real dilemma, however, is that the leverage works in both directions.
You may lose your whole investment in a matter of minutes due to the wild price gyrations that sometimes happen in these volatile markets. Let's say the $5000 contract drops to $4000 in value as opposed to increasing.
You've not only lost the original $500 you put on the contract, but an additional $500. You can go broke easily this way.
So why do folks play this game? Average investors do not wake up in the morning and say to themselves, "Right, I think I'll begin trading commodities."
What happens is, they get a sales pitch from a commodity trading "guru" claiming to have a "system" for producing sure-fire profits in these wild markets. These "systems" range in value from $25 all the way up to $5000 or more, and are sold according to the promise of "huge profits" from a small starting investment.
There is no sure-fire way to consistently generate income in these markets, simply because the underlying commodity prices can swing wildly back and forth based on a complex set of variables, several of which are totally unpredictable.
You can find also a handful of successful expert traders who make a living in these markets. But the vast majority of people who dabble in commodity futures lose funds.
Unfortunately, with the lure of huge returns and quick money, a fresh crop of innocent traders enter the market every year, only to be promptly fleeced out of their funds.
Don't be one of them! Get expert 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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