Commodity Fundamentals: How to Trade the Precious Metals, Energy, Grain, and Tropical Commodity Markets

CHAPTER 5

The Risks of Speculation

Iis not the intention of this book to convince you to speculate in commodities. My feeling is that the would-be investor should be continually reminded that commodities are fraught with risk.

To reinforce this point, consider what happens after you have decided you do want to speculate and you have selected a broker. The first order of business your broker undertakes is to have you sign a risk disclosure statement. This statement is furnished to you because Rule 1.55 of the Commodity Futures Trading Commission (CFTC) requires it. (You can obtain a complete list of certified contacts at www.cftc.gov.)

The risk of loss in trading commodity futures contracts can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade, you should be aware of the following:

1. You may sustain a total loss of the initial margin funds and any additional funds that you deposit with your broker to establish or maintain a position in the commodity futures market. If the market moves against your position, you may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the required funds within the prescribed time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account.
2. Under certain market conditions, ...