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What are the risks of Commodity Trading?

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As with any market investment, commodity traders absorb a certain element of risk with each transaction. For commodity traders who trade purely in order to hedge (commercial producers and consumers), potential losses in futures contracts is offset by the presence of an actual, sellable product. For speculators, however, losses in commodity trading can be especially devastating. Since the speculator doesn�t actually own the product underlying the contract, the speculator has no way to offset any losses caused by changes in the market. Some additional risks include:

Increased Recklessness: The ability of a speculator to purchase contracts on the margin may also be seen as a negative. Though the leverage benefits are nice, they may encourage excessive investment, which in turn can lead to overextension. Moreover, because commodity trading operates on a margin basis, you may lose more than you originally invested.
Slippage: Although this risk is of less concern as e-trading becomes more prominent, commodities are still frequently pit-traded. As a result, substantial chunks of time may pass between a trader�s call to a broker and the actual trade of a commodity by the pit trader. Understandably, the price may rise or fall significantly within that time.
Low Number of Viable Commodities Markets: The same factor which potentially simplifies a trader�s choice of futures contracts also serves as a liability. Because of the low number of viable markets, a commodities trader is less likely to discover an incorrectly valued commodity.

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