The Facts About Futures

July 4th, 2011, by

Q: I want to start investing, but I’m not sure where to start. I am 43 years young. Can you advise me on getting into futures?

Tara Hills, CA

A: The fact that you say you want to start investing and then ask about futures means you need to do a lot of homework before you put any of your money at risk investing.

A futures contract is an agreement to buy or sell a specific quantity of a commodity or financial instrument at a specified price on a particular date in the future. Commodities include bulk goods, such as grains, metals and foods; financial instruments include U.S. and foreign currencies.

Investing in futures should be left to sophisticated investors. “Futures markets are inherently volatile, complex, and risky,” says the Commodity Futures Trading Commission, the federal agency that regulates futures trading. The CFTC says investors need to be very careful about Web sites that offer high-yield investment opportunities in futures.

It also says investors lose millions of dollars every year in phony commodity pools.

Because trading in futures and options is appropriate only for certain businesses and individuals, the CFTC requires that a broker provide you with a disclosure document that describes the risks involved in entering into futures and option contracts. If you are determined to invest in futures, consider a commodity mutual fund or an Exchange Traded Fund that tracks individual indices or a basket of several commodities. A good article entitled “Community Funds 101” can be found on the Investopedia.com Web site.

For many individual investors, the best way to start investing is through mutual funds, especially index funds. If you have access to a workplace retirement plan, such as a 401(k), that’s a good place to start investing, especially if your employer offers a match. Often, people will ask me how to start investing, and I find out they are investing in their company’s 401(k). That is investing. Nonetheless, before investing, read the guides by Choose to Save, which will give you the basics you should know before putting your money at risk.

Last modified: July 6, 2011 at 2:20 pm