Entering the world of commodities

Here's how to make money by trading futures

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If you’re looking for another potentially profitable-albeit risky-investment vehicle, you may want to consider commodities. Through a futures contract-the agreement to buy or sell a specified amount of an investment at a particular price in a stipulated month-you can invest in such commodities as oil, grains, meat, financials, precious and industrial metals, and woods and fibers. (For more on currency trading, see "It Takes Money to Make Money," Moneywise, June 1999.)

Before opening an account, experts advise that you research brokerage firms and find a commodities broker licensed with both the National Futures Association and the Commodities Futures Trading Commission. Both agencies require their brokers to have a Series 3 license.

Commodities aren’t for the faint of heart or light of wallet: don’t trade with money that you can’t afford to lose-or with borrowed cash.

Crude oil is sold on the New York Mercantile Exchange. To be successful, you must stay abreast of industry trends, says C.S. McNeill, the president of MG Globe Trading Co., a Beverly Hills, California-based commodities trading and foreign exchange firm. "Crude oil prices are at a three-year low, with global supply outstripping demand," he says. But OPEC member nations have decided to reduce production quotas because the conflict in Kosovo is draining jet fuel supplies, so you can expect even more price volatility.

Pork bellies, a byproduct of lean hogs, are traded on the Chicago Mercantile Exchange. The margin requirement-the deposit an investor must make when buying a futures contract-is $1,620 per contract. Tim Hannagan, a Chicago-based trader and analyst with Alaron Trading, cautions investors that pork bellies are thinly traded and fluctuate a great deal in price on a weekly and daily basis. As a result, Hannagan recommends that trades should be conducted with tight stop-loss orders. (In a stop-loss transaction, the customer orders the broker to set the sell price of a security below the current market price to protect profits or prevent losses if the value of the security drops.)

Orange juice contracts, sold by the New York Cotton Exchange, generally provide a comfortable trading climate due to their seasonality. The margin requirement is $1,000. Experts say the period between March 1 and August 1 is when prices are at their most stable. Reliable supply and demand data is provided by the USDA, and its key reports exert great influence over orange juice pricing. Price volatility occurs between January 1 and February 15.