Five Pitfalls of Trading Commodities

For example, a copper miner who knows it has a production problem at one of its mines might decide to speculate in copper futures before the news is widely known. There would be nothing illegal in that, even though it puts the small investor at a disadvantage.

In addition, commodities brokers tend to be able to see the flow of customers orders before the trades are executed. That's illegal for stockbrokers.

The Greater Fool

It also needs to be remembered that commodities are not truly investments -- they throw off no cash dividends or interest coupons. The only way to make money by purchasing them is to sell them to someone willing to pay more, akin to the "greater fool" theory of investing.

While you hold these instruments, presumably waiting for the price to rise or fall in line with your goal, one way or another you'll be paying for the storage of the commodities, explains Matt Turner of Virtual Metals in London. That shows up in what's called the "yield roll" in the term structure of the futures market.

In short, if the price of the underlying commodity doesn't move, you'll likely be losing money -- albeit slowly. (Note: there are occasions when this works in reverse. But the area is fraught with complexity and would-be traders should consult with experts.)

There is tremendous asymmetry of information in the market with regard to demand and supply. Comprehensive data is notoriously difficult to find even for those willing to shell out big bucks.