2 weeks ago admin Comments Off on Trading commodities
Why don’t people want to trade commodities? It’s true that many people are worried or concerned about trading commodities because they may have heard rumors about the dangers of doing just that – rumors that may have been inspired by people who goofed up or those who simply don’t understand commodities as a worthwhile form of investment. They may tell you that your house may be filled with a truckload of unwanted canned goods, that commodity prices vary too much or that nobody makes money out of commodity training.
The quickest answer to that is that if nobody makes any money, nobody (or hardly anybody) would do it. And quite obviously people do!
So what are the issues, the snags involved in trading commodities? One worry is the high amount of leverage which is available to the commodity trader which he or she may not quite know how to cope with. The “down payment” expected is at most 15% and can be as little as 3% whereas to deal in stocks requires 50%. The fact is that commodities are not necessarily more volatile but the crucial factor is to manage the leverage. A small increase in their value can bring big dividends but conversely – and dangerously – a small drop can wipe out your investment. The moral of the story is to keep down the number of contracts and thus remove the danger from extended leverage.
Let’s go back to the question of whether being a commodity broker is going to mean that truck of canned goods or oranges or whatever being delivered at dawn by a driver who just wants your signature on the docket and then he’s away. In fact only the big commercial traders get caught up in handling the actual goods themselves. The requirement is that you close your futures contract prior to the first notice day, all will be well and even if you forget, your broker will probably remind you.
Contrary to what you might have expected, you don’t have to be a person of great fortune to become a commodity trader. It is quite normal for people to open an account with $5,000 or even as little as $2,500. However the commodity market is not one you should bet the house on so you have to regard your initial investment as risk capital, something that you wouldn’t want to lose but at the end of the day you could grit your teeth and swallow it. But the risk needs to be moderate – don’t bet the lot on one solitary if hopeful trade.
So in conclusion – can you make money from trading in the commodity market? As with all trading, the key is to get to know the markets well and to have a sound trading strategy. The “winning” trader is probably getting rich over a considerable period of time at the expense of a whole raft of other traders. If you understand the pitfalls and are realistic in your approach, success may well be yours.