Page 429 - How to Make Money in Stocks Trilogy

Money Management 299

T-bills and bonds, plus foreign currencies. One of the more active stock
indexes traded is the S&P 100, better known by its ticker symbol OEX.
Large commercial concerns, such as Hershey, use the commodity market
for “hedging.” For example, Hershey might lock in a current price by tem-
porarily purchasing cocoa beans in May for December delivery, while
arranging for a deal in the cash market.
It is probably best for most individual investors not to participate in the
futures markets. Commodity futures are extremely volatile and much more
speculative than most common stocks. It is not an arena for the inexperi-
enced or small investor unless you want to gamble or lose money quickly.
However, once an investor has four or five years of experience and has
unquestionably proven her ability to make money in common stocks, if she
is strong of heart, she might consider investing in futures on a limited basis.
With futures, it is even more important that you be able to read and inter-
pret charts. The chart price patterns in commodity prices are similar to
those in individual stocks. Being aware of futures charts can also help stock
investors evaluate changes in basic economic conditions in the country.
There are a relatively small number of futures that you can trade. There-
fore, astute speculators can concentrate their analysis. The rules and termi-
nology of futures trading are different, and the risk is far greater, so investors
should definitely limit the proportion of their investment funds that they
commit to futures. There are worrisome events involved in futures trading,
such as “limit down” days, where a trader is not allowed to sell and cut a loss.
Risk management (i.e., position size and cutting losses quickly) is never more
important than when trading futures. You should also never risk more than
5% of your capital in any one futures position. There is an outside chance of
getting stuck in a position that has a series of limit up or limit down days.
Futures can be treacherous and devastating; you could definitely lose it all.
I have never bought commodity futures. I do not believe you can be a
jack-of-all-trades. Learn just one field as completely as possible. There are
thousands of stocks to choose from.

Should You Buy Gold, Silver, or Diamonds?
As you might surmise, I do not normally recommend investing in metals or
precious stones.
Many of these investments have erratic histories. They were once pro-
moted in an extremely aggressive fashion, with little protection afforded to
the small investor. In addition, the dealer’s profit markup on these invest-
ments may be excessive. Furthermore, these investments do not pay inter-
est or dividends.