3 Myths of Investing in Commodities

Investors tend to stray away from commodity trading due to different myths or misconceptions surrounding it. These misconceptions are made mostly by the general public and even the investment community.

Oil spill over dollars printed charts and graphs
Crude oil is spilled over a surface covered by dollar bills while printed copies of graphs and charted data surrounds it.

These myths was not just procured recently, they instead date back many decades. They are also probably made by traders that had lingering hate towards commodities. Or those people who think that commodity trading is just too hard for them to understand.

You might have heard things like commodities being too volatile – it’s something that cannot be avoided from any investment. Or that you couldn’t make any money trading commodities. Well, news flash, people do make money trading commodities, otherwise it won’t still be existing now.

Let us list down 3 of those commodity trading myths that you have probably heard:

Myth #1: There is too much leverage

So far, when it comes to trading commodities, leverage has become the biggest problem.

Normally, you only have to put around 3 to 15 percent of total value of a futures contract in the margin. That is far less than the 50 percent required when it comes to stocks. This in turn surprises many new commodity traders who have no idea how to handle their newfound incredible leverage.

In reality, if you remove the leverage factor from commodities, it is no more volatile than stocks as an asset.

You can gain double of your investment if the commodities move up a little in value. But it can also wipe out your entire investment if commodities move down a little in value.

In order to be successful, you need to trade fewer contracts than what the margin requirements allow. You should only trade 1 or 2 future contracts at a time, depending on the situation. Just remove the extreme leverage factor that gets a lot of new commodity traders in trouble.

Myth #2: You do not have enough money to trade commodities

Most commodity brokers will let you open an account with $5,000 while there are also some that start at $2,500. This money will be considered risk capital since commodities can be a risky investment.

The problem with this amount is that the investors decide to take on too much risk for their account size. Traders usually end up rolling the dice and betting everything in one trade.

Do not fall into that trap.

Going for a respectable return of 25 percent per year will be better for you in the long run.

Myth #3: Nobody makes money from trading commodities

The fact of this myth is that a lot of people do end up losing money when trading commodities. However, this usually happens to unprepared investors who jump into the commodity markets and lose within six months. They usually don’t return again.

Others get addicted and repeatedly try to make profits through the same strategies but just keep losing.

But there is a good side to this market. Commodity investing is a zero-sun game. This means that with every dollar lost, someone gains a dollar. Technically, transaction costs need to be factored in which means loss and gains will not be a mere dollar.

Conclusion

You can make money from trading commodities regardless of your experience. It may not be easy, but with enough research and a good strategy, you can do it. And with sound money management skills added, you have a better chance of success.

So there’s no need to run the other way after hearing this myths regarding commodity trading. It does not give you a realistic image of investing in commodities.

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