How to Invest in Futures

Commodity trading is risky, but can yield high return profits.

Commodity trading is risky, but can yield high return profits.

Commodity trading is a high risk investing market where the goal of investors is to profit from an anticipated future price increase. Traders who invest in futures agree to receive a product at a future date. The buyer sets the price and terms of delivery in advance. If prices increase during the time when you enter into a contract, but before you receive the commodity, you have already secured your price. A major drawback is that you shouldn’t invest money that you can’t afford to lose.

Open a managed account. Unless you are highly knowledgeable about this type of investing, there might be less risk if you allow an experienced professional to make trading decisions for you. Ask questions about anything you don’t understand before you open an account. If you are well informed about this type of trading, a non-discretionary individual account allows you to make all the trading decisions. A broker then executes the transactions for you.

Invest in a commodity pool. This offers the smallest amount of risk to investors as funds are combined and traded as one. Instead of opening an individual account, you actually purchase a share in the pool. Again, seek the services of an experienced and skilled broker to execute trades for the pool.

Know what market risks are involved. The U.S. Commodity Futures Trading Commission (CFTC) recommends determining how much beyond your original investment you can afford to lose before entering into a contract. Your broker is required to give you risk exposure documents describing the risks involved. Review the information carefully. Be sure that any broker or firm that handles your funds is registered through the National Futures Association, a self-regulatory organization approved by the CFTC.

Weigh your financial goals. Gains are not always immediate and potential losses can cost you more money than what you invest. Discuss with your broker the different methods of trading. Request information about a market’s past performance. Decide for how long you want to invest and set limits on the amount of loss you are willing to risk.

Warnings

  • This type of investing is not for everyone as it can be risky and complicated. Individual accounts can incur huge losses. In addition, broker commissions and fees reduce your rate of return.
  • Individuals investing in commodity trading should be cautious about any claims guaranteeing profit at minimal risk.

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