4 Common Myths of Investing in Commodities Futures

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(Newswire.net — June 12, 2019) — There is a lot of misinformation going around regarding the commodities market. As a result, many people have ruled it out as a worthy place to invest. While you can attribute some of the bad attitudes to the negative messages failed investors perpetuate to cover up for their failures, the lack of information is also a big problem. Many people do not understand how markets work as the market is not as well-covered as the stock market, for example. Let’s take a look at some of the myths and misconceptions surrounding commodities trading:

1. You need Huge initial investment

Many people think that you need to have a ton of money to trade commodities. While that may have been true many years ago, it is no longer the case. The barrier to entry has been lowered significantly over the past few years to encourage participation. Some brokers will let you open an account for as low as $500. On top of that, the leverage rules are relatively lenient allowing you to make even more money if you manage the inherent risks well.

2. Nobody Earns Profit

A well-worn myth doing often spread is that no one makes money in this market. Some even believe that the only time investors ever really made money trading commodities was during the two commodity bubbles. They say that other than those periods of high gains, the rest of the time, people are always losing. First, we need to understand that in any market, there are always winners and losers. Even in the equities market, there are some people who lose money while others continue to record returns.

Going back to commodities markets, there are two main entities who make money; the market makers and the traders who profit. The market makers take a cut for creating the infrastructure and providing oversight thereby facilitating the trade, and that’s it – the rest goes to the successful traders. Think about it, if everyone lost money and only the market makers made profits, everyone would be going home with their investment minus the trading fees. But as evidenced by the fact that some traders lose more than that, this assumption is untrue.

3. The commodities will be delivered physically

Some people believe that if you are dealing with commodities futures, at one point you may have to handle the stock physically. They imagine a huge truckload of wheat, oil, timber, or whichever commodity they are trading being delivered to their suburban home where they have no capacity to store or handle it. However, this is not how futures contracts work. All that the commodities traders do is provide proof that the product is in a warehouse. In addition, things cannot get out of hand if you close your futures contract in time – ideally within the first notice day. This first notice day is conveniently set to a date long before the contract expires. If you forget the actual notice date, your broker is obliged to remind you to enable you to handle the business in time.

4. You should maximize the leverage

By design, the futures market allows traders significantly larger amounts of leverage than other markets. For perspective, consider the fact that while the stock market requires traders to raise 50% of the investment, the commodities market’s requirement is 5-10%. So, what do the traders who end up losing do? They max out on the leverage and invest in a large trade as the margin requirement allows. Let us look at a hypothetical scenario: Assume that one futures contract is worth $10,000 with a margin requirement of 10% ($1000).

If a trader has $10,000, he can buy 10 contracts where leverage takes care of the extra $9,000. If the contracts appreciate, he will stand to make more money than he would have if he bought 5 contracts with his $10,000 with a margin of 20% ($2,000 margin for each contract). Conversely, if the contracts depreciate, the losses will be larger if he maxed out. The traders who get it right are those who use leverage reasonably as they trade commodities. They understand that the commodities market still carries risk and that leverage is a double-edged sword.


Many people are discouraged when they intend to trade commodities because they don’t know how the market runs. They should, therefore, try to learn more about it before they rule out a viable diversification option. Moreover, to rectify the problem of insufficient documentation detailing the performance of commodity futures historically, Vanguard is helping out.