Commodities

Playing the Riskiest Game


The fastest, toughest, highest-risk financial game of all, there are commodities. As many as 90% of all amateur traders lose money and drop out within a year, and the only consistent winners are the brokers who charge your commissions. Still if you crave excitement and have a cast iron stomach, commodities trading can offer impressive gains for that tiny portion of your investable fund that you are willing to put completely at risk--your mad money. But unless you are an expert, never put more than a nickel or dime out of every investment dollar into commodities.


When you play the futures market, the contracts you deal in give the right to buy a specified commodity at a set price for limited time. Let's say the price of gold is $300 an ounce, and you think it will rise in the next six months. Then you can invest in a contract to buy 100 ounces of gold about $300 an ounce. That's $30,000 worth of gold. But speculating in gold futures cost less than 10% of the price of the metal. If gold goes up to, say $350 an ounce by the time you contract expires six months from now, you win. Your profit will be $50 an ounce, or $5,000---minus commissions.


But if prices move strongly against you, your broker will demand that you put up still more money. Unless you produce the cash immediately, the broker will sell out your position, at a potentially bone-chilling loss. To avoid that, give your broker a stop-loss order on each futures contract. That way, you can establish in advance a price at which you will automatically sell out a position rather than take further losses.


Small investors who speculate in commodities make two major mistakes. many of them operate on the basis of tips, thy are often wrong, and the amateurs cannot hope to match the professional traders for access to update, accurate information about markets. small investors also tend to be under capitalized. to stay in this game, you should have five dollars in reserve, ready to commit, for every dollar you put up.


You can make do with less money by buying mini-contracts. Mini contracts control smaller quantities of commodities than do regular futures, but thy are just as volatile as full-size contracts, and you will still get margin calls. But because you put up proportionately less money, you have less lose.


A reasonable way for small investors to get into the market is to buy one of the publicly traded commodity funds. The advantage is that the funds are professionally managed and diversify your investment among many types of commodities. More important, any losses are limited to the amount of money you put up; you are never subject to a margin call. but before you invest, be sure to check the fund's past performance.