You might have come across many skeptics who tell you that investing in commodities is a bad idea for several reasons. In most cases, people are unaware that commodity markets are like any other investment avenues and the amount of risk that one can take is simply dependent on one’s own appetite. A futures contract is essentially a risk transfer mechanism and the amount of risk a speculator wants to take can be controlled. In this article we list the common misconceptions that people might express about the futures market and try to debunk these “myths”.

1)      Understanding the Market is too difficult

While it is true that markets seem to have a life of their own, prices are determined fundamentally by the laws of supply and demand. In the very short run, it is almost impossible to make predictions, but the longer the time elapsed from the fundamental events, the more their effects can be witnessed on the price. Seasonal variations also need to be taken into account. Using fundamentals only improves your chances of success but does not guarantee anything. After all, a prediction is only an educated guess.

2)      Commodity markets are too volatile

This impression most likely derives from the fact that people witness prices fluctuate continuously and leveraged buying poses significant risk to investors. There is nothing special about this phenomenon and the same holds for other investments such as stocks and even fixed asset securities. In fact, prices for commodities rarely fluctuate more than 4-6 percent while it is common for stocks to fluctuate by even 20 percent in a single day. Leveraged buying allows for huge profits to be made, but it is important for investors to know how to take advantage of this.

3)      I’ve heard most people lose money trading commodities

Commodity futures are no different than other investments and treating the market as a big casino is usually the reason why people lose money. As with any investment, careful understanding of the fundamentals and a high level of discipline is required. Professional traders have a strong record of giving 20-30 percent annual returns consistently for their clients by using the right set of fundamental and technical tools. Investors should not be purely motivated by fear of greed when trading.

4)      Commodity trading is only for the very rich and requires large amounts of money

Of course, having more money to start with helps to generate more money as well as protect you from losses incurred. However, derivative markets are essentially set up so that a small investment can control underlying assets many times their worth. Thus, not much money is required. At MEX, mini contracts such as Mini-Silver and Mini-Gold contracts can be controlled for relatively low margins.

5)      Where is the delivery?

Most people buying futures contracts across the world never expect delivery. The role of the speculator is to add liquidity to the market and facilitate in the price discovery mechanism. Hedgers and Arbitrageurs are usually the parties that take deliveries.  So it is not necessary to take deliveries as long as speculators offset their positions before the expiry date of their contracts.

6)      Prices are affected by big buyers and easy to manipulate