The commodity markets involve wheat, corn, soybeans, pork-bellies, gold, silver, heating oil, lumber, S&P and a number of other common commerce items. The big organizations that exist in these markets employ commodity "futures" contracts to lock in their selling prices for the merchandise in advance of delivery. This procedure is known as "hedging." On the completely different aspect of that deal is the trader, who gambles on whether or not the value of the commodity will go up or down before the agreement is due for delivery. Because futures contracts may be purchased employing less cash outlay, these financial instruments lend themselves to speculation.
As an example, control of a corn future valued at $5,000 could only need $500 of real funds, or 10% of the face worth of the contract. If the wheat 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. Associate this with the usual bond market, which limits leverage to 50%, so that $5,000 worth of bond requires a minimal of $2,500 of money. 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 surely looks extraordinary, right?
You can easily notice the reason why investors in search for of quick profits are lured by the allure of massive gains using extreme leverage in commodity futures trading. The true dilemma, however, is that the leverage works in BOTH DIRECTIONS. You can lose your complete initial capital in just a few minutes due to the extreme value gyrations that every now and then manifest in these volatile markets. Let's say the $5,000 contract drops to $4,000 in price instead of increasing. You have not only lost the initial $500 you put into the contract, but an added $500. You can go bust speedily this way.
So why do everyday people get involved in this game? Average investors do not wake up and declare to themselves, "Right, I believe I'll begin trading commodities." What occurs is, they obtain a sales newsletter from a commodities "guru" saying that he claims to own a "system" for generating definite gains in these volatile markets. These "systems" range in price from $25 all the way up to $5,000 or more, and are sold primarily based on the assurance of "huge profits" from a small starting investment.
Newsletter writers or commodity gurus regularly pitch the myth about turning $5,000 into 1,000,000 bucks within less than a year. The regular commodity technique pitch arrives in a sales letter or publication that describes a system for winning on "9 out of 10" trades or identical puffed up claims.
Of course, if it was realistic to safely trade 90% of the time, a person could easily make millions of dollars in a very short period of time. So why are these newsletter writers so curious for you to spend $195 on their super-duper trading course? Simply because they probably aren't making any real moolah with their personal trading system! There's much easier cash to be made promoting people on the belief of getting into commodity futures trading.
There is no 100% way to always make money in these markets, simply considering that the underlying commodity prices points can move wildly back and forth based on a complex set of variables, most of which are totally unpredictable. That's why the only folks consistently making money in the commodity markets are the dealers, who collect a fee for executing the trade irrespective of whether you win or lose.
There are also a handful of successful professional traders who make a livelihood in these markets. So at all times train with a professional who can show you that he/she can make money in these markets. Keep in mind, the blind cannot lean the blind. But the great percentage of individuals who dabble in commodity futures lose money. Regrettably, with the lure of big returns and easy money, a new batch of innocent traders comes intp the market each and every year, only to be swiftly removed out of their money.
Please do not be one of them! Leave commodity futures trading to the professionals and stick with the more boring kinds of investment, like mutual fund investing or stocks and bonds.
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