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Myths of Investing in Commodities

We know that many investors like you are somehow reluctant when it comes to trading with commodities or even with other investments. This is due to a variety of myths or misconceptions by the public and even the investment community. But today, we’ll focus with the myths of investing in commodities.

These myths or misconceptions have been out there since the long run and some of these are one of the reasons why investors are afraid to invest in commodities.

You may have heard things like commodities are too volatile or you’ll think if you trade commodities you will have a truckload of coffee beans discarded on your front lawn. Or maybe you’ve heard some unsuccessful traders saying that nobody can make money from trading in commodities.

Myths of Investing in Commodities

Well, listen carefully, traders DO MAKE money in commodities trading.

Here are some myths or misconceptions that you should not listen or follow.

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Myth #1 – Taking Delivery of Commodities

Okay first of all, this is something you really don’t need to worry about. You should know that only the commercial players are involved in making and taking care of delivery of the commodities.

As long as you close your futures contract before the first notice day. This actually occurs a few weeks before the contract expire, which is why you should not worry about this.

However, if for some reason you kind of forgot about the first notice day, your broker would certainly catch it and contact you immediately.

Myth #2 – Too Much Leverage

So far, leverage is probably one of the biggest problems when investing in commodities. Usually, you only have to put up about 3 to 15 percent of the total value of a futures contract in futures margin.

That is far less than the 50 percent that is needed for stocks. And, as usual, many new traders in commodities do not know how to handle their newfound gift of unbelievable leverage.

You should know that in reality, commodities are no more volatile than stocks as an asset class if you remove the leverage factor.

The main problem with many investors in commodity is that they will invest a $30,000 account as if were $300,000.

A great example of this is that they might buy 10 futures contracts that have a margin of $3,000 and control $300,000 worth of commodities. Therefore, if the commodities move up a little in value, they made $30,000, which doubled their investment.

Nevertheless, if the commodities declined a little in value, their investment would be wiped out.

If you want to be successful, you should trade far fewer contracts than what the margin requirements allow. Remember that you should remove the extreme leverage factor that gets so many new commodity traders in distress.

Myth #3 – Nobody Makes Money in Commodity Trading

The fact here is that many investors do lose when trading in commodities. However, the traders who lose are usually ill prepared investors who literally jump into the commodity markets. They are the one who lose in the expand of six months, never to return.

Meanwhile, some investors get addicted to the markets while trying repeatedly to make a killing with the same strategies they have used and just keep on losing.

The good news here is that commodity investing is a zero-sum game, which means that for every dollar lost, someone gains a dollar.

You have to factor in the transaction costs, so each investor loses a little more than a dollar and the other party gains a little less than a dollar.

Now, you may be wondering and eager to ask who makes all the money, the answer is, the professional commodity traders and money managers that consistently make money year after year.

Also, amateur commodity traders who makes money tends to trade for a long time, maybe for more than 30 years. In that period, that trader has probably gathered money from hundreds of commodity investors along the way.

You should also know that a successful amateur traders and professional traders usually trade larger amounts of money.

Myth #4 – You Do Not Have Enough Money to Trade Commodities

Many commodity brokers will allow you to open an account with $5,000, while some even allow you to start at $2,500.

You should know that this money is going to be a risk capital as commodity tends to become a risky investment.

The only down side with accounts with this size is that some investors take on too much risk for their account size. They tend to roll the dice and bet it all on just one trade.

Remember to not fall into that tricky trap. If you shoot for a respectable return of 25 percent a year, you will do much better in the long run as opposed to trying to hit a home run.

Myth #5 – It is Difficult to Understand the Market

Many investors are thinking and saying that the commodity market is hard to understand. Well, do not listen to them, because the commodity market is just easy to understand.

You should remember that all the commodities are globally traded and the global-demand supply situation is widely known and is available to anyone who reaches out for it.

Therefore, understanding the commodity market is not that complex. Since it is a basic economic factors and seasonal cycles that affects prices.

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Conclusion

Every investments have their own myths and misconceptions that people are saying and spreading around the investing market. Some are proven but mostly are just faux that some investors who are just starting to invest tend to believe.

You should remember that before you enter an investment you should have the knowledge about the investment. Have a background check, learn about its pros and cons, and check about the myths and misconceptions that some investors are saying about this particular investment. Know if these myths are true or just simply nonsense.

Myths and misconceptions are sometimes placed or made to mind trick some investors to not invest in a particular investment.

As an investor, you should know the truths and what are the myths. So, you will succeed at the end of your investing journey.

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