FREQUENTLY ASKED QUESTIONS
 
Over the years, industry surveys of more than 10,000 prospects have determined their specific questions about futures trading. When an account executive answers each of these questions honestly and completely, he (or she) opens more accounts than a broker who does not. More importantly, informed clients are better clients. 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.