Here are answers to the questions that overcome many of the barriers to gaining new clients.

Is there any truth to stories I have heard of some investors being wiped out in futures?

Yes, it does happen; however, it is usually because the investor tries to make a killing, and exposes himself to considerable risk – more risk than the investor is in a position to handle. For example, speculating in a highly volatile commodity with little capital, and adding to the position when the market moves favorably (rather than liquidating some of the original contracts at a profit) could be an expensive mistake. Like any business transaction, the futures markets can be approached with reckless abandon, or with common sense and good business judgment.

Is there any truth to stories I have heard about people becoming millionaires on small amounts of capital in futures?

Yes, there have been such cases (although not as common as they might seem). Futures traders have turned $5,000 into $20,000, $100,000, or more. The potential for large profits is inherent in the futures market; however, when there is an opportunity for large profits, there is also a corresponding risk potential.

Do most futures traders lose money?

The U.S. Department of Agriculture conducted a study several years ago of people who speculated in agricultural commodities. They found that only 25% of the speculators made money. The study further showed that most of the traders started with $5,000 or less, and went through their capital in just six months. The average loss was about $2,000. These statistics reflect two of the major pitfalls a futures trader should avoid: too much trading, and too little capital. For specific pitfalls traders and brokers should avoid, see Why Most Futures Traders Lose Money (Center for Futures Education, Inc., Grove City, PA, 1989).

Is there any chance someone would try to deliver 5,000 bushels of soybeans to me if I don't sell in time?

This is a standard joke in the industry. It is totally false. Accidental delivery to your front yard can not happen. "Delivery" of grain (and many other commodities) takes place in the form of a warehouse receipt for the physical commodity. With precious metals, for example gold and silver, "delivery" occurs in the form of a bank document guaranteeing the quantity and quality of the metal in the bank's vault. Whatever the commodity, the delivery process begins with a "notice of intention to deliver," not with the physical commodity. Also, before delivery of any commodity can occur, payment or financing of the total contract value must be arranged. Then the brokerage firm must issue delivery instructions, including method of shipment, place of delivery, and delivery date.

Now can you sell what you don't own in futures?

You don't need to have the physical commodity or own a contract for the commodity to go short (sell). You are simply agreeing to sell the physical commodity at a later date. You also have the opportunity to repurchase the contract before delivery is required.

Often, it is easier to make money on the "short" side because prices tend to move more sharply and quickly when declining than when rising. Also, unlike the stock market, you don't have to wait for an up-tick before going short.

What about all the shouting and arm waving in the futures pits?

It doesn't look very professional. A futures trade is a precise financial transaction. There is direct contact between the buyer and seller; every order is confirmed visually, orally, and in writing. All orders and fills are "time-stamped." At the end of each trading day, all completed trades must balance – every filled sell order must have a corresponding buy order, and vice versa, all with the proper number of contracts and at the agreed prices.

At the end of each trading day, customers' accounts are settled, listing all open positions; the trading activity for that day (if any); all pertinent dates, purchase prices, and settlement prices; open equity (the value of open positions); total equity; and how much each account is worth.

Isn't futures trading just gambling?

No. The futures markets permit producers or owners of commodities (e.g., wheat, sugar, gold, stocks, bonds) to transfer the risk of growing or owning these commodities to futures speculators. Those who use the futures markets to transfer risk are called hedgers. Speculators assume the risk of price change that hedgers seek to avoid. Speculators seek the opportunity to profit. When a speculator assumes price risk, this allows the hedger to concentrate on the more controllable aspects of his business. Futures speculation is unlike most investments in that price movements are magnified by the leverage resulting from deposit requirements representing only 5-10 percent of the full contract value. Additional margin deposits may be required, depending on market fluctuations. Price changes affecting the hedgers' physical position can be offset by a comparable price change in the futures position.

Isn't futures trading risky?

I've heard stories of people losing very large sums of money in futures.

Yes, like any other speculative, highly-leveraged financial activity, futures trading can be risky if it is not approached as a business. Here's an example of imprudent trading: Jim Trader has $30,000 to invest, and thinks the price of gold is going to rise. If he puts the entire $30,000 into gold futures with $1,500 margin per contract and the price of gold declines $15, he loses the entire $30,000. If the price rises $15, he makes about $30,000, less commissions. Notice that leverage can work for you or against you.

The above example is extreme. Traders should not use their entire investment amount for margin money. A good rule of thumb is to keep at least half in reserve as protection against normal market fluctuations.

Also, it is unlikely that an investor would stand by and do nothing while the market moved against him. An order to liquidate might cut his losses, which is an important money management technique for successful futures trading.

How much time do I have to spend each day if I trade futures?

From no time to several hours, depending on the depth of your involvement. Unless you are prepared to make a thorough study of the markets you plan to trade, you may do better trading with the help of a good brokerage firm and account executive. Professionally managed accounts require very little time.

To try and predict prices, should I use news, like a drought, or those complicated looking price charts?

As you may know, fundamental analysis is concerned with basic supply and demand information, such as the GNP growth rate, disposable income, unemployment levels, weather patterns, carryover supplies, and agricultural reports. At different times, such information impacts on the market differently. Technical analysis is concerned with price action such as trading volume, open interest, and price movement. Advocates of a strict technical approach argue that market price is the best indicator in any situation because it includes expectations and fundamentals. Many traders use fundamental analysis to determine the direction of the market, and technical research to time their entry and exit. You may want to learn more about the two approaches before deciding what works best for you.

How safe is my money? Are the futures markets financially sound?

Absolutely, unequivocally yes! The Clearing Corporations of the various commodity exchanges guarantee every transaction on their exchange. The Clearing Corporation is separate and independent from the exchange. The Clearing Corporation interposes itself as a guarantor of every contract, acting as a buyer to every seller and seller to every buyer. This establishes the Clearing Corporation as the payment and collection agency for its members and, through them, their customers. Each clearing firm must pay the Clearing Corporation in full for each day's market activity before the market opens for trading the next day. Based on the previous day's settlement prices, payments are made by wire transfer. Each clearing firm begins each new day of operation without debt to the Clearing Corporation. In this way, debt exposure is limited. Clearing firms, in turn, collect from or pay (credit) their customers daily. This is how the Clearing Corporation effectively guarantees performance of every cleared contract. Their obligations are backed by guaranteed funds deposited by the clearing firms, by the Clearing Corporation's own capital, and by its power to make assessments on its clearing firms. In addition, Federal Regulations require customers' margin funds to be segregated from the other assets of any firm licensed as a futures broker.

Are there any trading rules I should follow?

Several commodity exchanges, as well as some brokerage firms, have published materials that include excellent guidelines. Basic Training for Futures Traders, and Advanced Training for Futures Traders (Center for Futures Education, Inc., Grove City, PA, 1989) may also be helpful.

How much does it cost to open an account?

Different brokerage firms have different minimums. Also, it depends on whether you trade futures or options on futures. You may be able to open a managed account for as little as $5,000, or invest in a fund for less than a normal trading account. There are many professionals who suggest that you should not open a speculative account with less than $25,000, although some reputable firms accept accounts for less.

What's a good way to start?

You may want to select a commodity you are comfortable with, perhaps a product related to your business or where you live, or simply one or two you find interesting. Then you may want to try "paper trading" (practice trading). Don't be in a hurry to trade. If you don't have enough risk capital to trade properly, wait until you do. The markets and opportunities will be here...whenever you're ready.

How big is the futures industry?

Compared to the securities industry, it is relatively small. For instance, estimates indicate their are over 30 million people trading securities, while less than a half-million trade futures. There are about 3,000 stocks on the New York and American Stock Exchanges, while there are about 50 actively traded futures contracts. Futures trading was established when the Chicago Board of Trade officially opened on April 3, 1848. Since then, particularly in recent years, trading volume has soared. The industry total in 1970 was about 13 million contracts, in 1980, almost 100 million contracts, and now, annual volume is over 200 million contracts.