Thinking of investing in the commodities and futures markets? The biggest single risk—that of doing business with a dishonest salesperson or firm—can be avoided at the outset with a little healthy curiosity on your part.
Here are a few tips to help you avoid those pitfalls. Find out if the firm you are considering is a member of the National Futures Association or is registered with the Commodities Futures Trading Commission. Call the National Futures Association’s Information Center at 1-800-621-3570. Find out how long the company has been in business. Will they give you a published disclosure statement? Find out where your invested funds will actually be held.
Remember, if an investment sounds too good to be true, it probably isn’t true!
Here are a few tips on how to spot a “shady” commodities trader before he pulls you into a deal that is “too good to be true.” Some red flags to watch for include:
- unsolicited high-pressure phone calls
- claims of secret inside information
- advice to act quickly or lose out
- promises of incredible profits
- assurances that there is really no risk involved
Watch out for contracts that include phrases like “fixed maturity” and “deferred delivery.” Regulated commodities exchanges don’t operate like that. What phrases like that really mean is that you are not going to see your money again for a long time, if ever.
Additional things to think about before you invest is to check whether the company’s transactions are handled through a regulated commodities exchange. It’s a good idea to find out what percentage of your initial investment will be allocated to commissions; fees or “other” costs. Ask for a copy of the firm’s financial statement and for individual references. Any firm that hedges its answers with any “ifs,” “maybes” or “buts” is sending out a danger signal that the prudent investor should heed.