The Myths of Investing in Commodities

There are many myths and misconceptions floating around when it comes to investing in commodities. This makes many investors reluctant to try their hand at commodities trading. Many of these myths have been around for a long time. They probably came about because some investors were not successful traders. You’ve probably heard that no-one can make money trading commodities. Since this is not true, what else isn’t true when it comes to commodities trading myths?

1. Too Much Volatility; Too Much Leverage

Many investors feel that commodities are far too volatile, and that leverage is too much of a problem. Typically, you only need to put around 4-15% of the total value of a futures contract in margin, which is a lot less than the amount required for stock futures. Plus, with the incredible amount of leverage available, many new commodity investors don’t know what to do with themselves. The truth is that with the leverage factor, commodities have no more volatility than stocks.

The key to debunking this myth is not to overtrade. With the leverage that is available, if the commodities move up a little in value you can double your investment, but if they go down a little in value, you can wipe out your capital. It is important to trade much fewer contracts than what the margin requirements allow to remove the leverage factor that ends up being the downfall of many traders.

2. Mandatory Delivery of Commodities

Many trades get nervous about the delivery of commodities, but this is not something that should concern you at all. Delivery is only mandatory in specific situations and is generally limited to commercial players.

As long as you close your futures contract before the first delivery notice day which is usually within a week or two before the contract expires, you won’t need to worry about it. Even if you forget about the first delivery notice, your broker will be on top of it.

3. You Can’t Make Money Trading Commodities

Of course, there are people who lose money trading commodities, but there are also people who do make money. There are many reasons why someone might lose money consistently when trading commodities. You might jump in unprepared; you might use the same losing strategies repeatedly; or you might trade by emotion, becoming greedy or fearful.

The good news though, is that if someone loses money, another person makes money. So, who are the traders who are making the money? Trading takes a lot of work to be successful. You need to create a strategy, develop money management skills and do your research. If you put in the effort, you can certainly make money trading commodities.

The Bottom Line

There are plenty of myths surrounding commodities trading and we’ve only just touched the surface. Most of these myths were started by people who were not successful, but it is important to know that there are people who are successful, and you can be one of them with the right strategy, techniques and effort.