In a sense, entering into futures contracts is not "investing," because a contract is initially opened with zero value, and has an expected return of zero. In other words, it's theoretically a gamble with a 50-50 chance of winning or losing, not counting transaction costs.
Having said that, however, futures can be used conservatively, to hedge against events that would cause a person's other investments to lose purchasing power.
Long term, it's virtually certain that the price of crude oil will continue to rise, as world demand expands and readily available supplies are drawn down and sold at a higher price by the countries that control them. Eventually, I foresee the price rising to the point that gasoline is largely replaced by hydrogen or some other renewable fuel in cars, and the remaining oil is used mostly for aircraft.
A way to hedge against this eventuality is to enter into long-term futures contracts to purchase crude oil. Contracts are available as far in the future as December 2008, with the current price being about $23 per barrel. This represents a substantial discount to the spot price of about $27 per barrel. Since one contract is for 1,000 barrels, owning one contract commits a person to purchase 1000 barrels for $23 per barrel. Realistically, the potential loss might be around $8,000 if the price would temporarily drop to $15 per barrel, but the potential gain is much greater. For example, if the price of oil went to $40 per barrel, the gain would be $17,000 per contract. That would certainly help to defray the increased price of gasoline and heating oil.
The major concern about trading futures is psychological -- that people approach it like gambling and get "hooked" on short term trading rather than long term hedging. But stock ownership can have the same pitfalls.
Having said that, however, futures can be used conservatively, to hedge against events that would cause a person's other investments to lose purchasing power.
Long term, it's virtually certain that the price of crude oil will continue to rise, as world demand expands and readily available supplies are drawn down and sold at a higher price by the countries that control them. Eventually, I foresee the price rising to the point that gasoline is largely replaced by hydrogen or some other renewable fuel in cars, and the remaining oil is used mostly for aircraft.
A way to hedge against this eventuality is to enter into long-term futures contracts to purchase crude oil. Contracts are available as far in the future as December 2008, with the current price being about $23 per barrel. This represents a substantial discount to the spot price of about $27 per barrel. Since one contract is for 1,000 barrels, owning one contract commits a person to purchase 1000 barrels for $23 per barrel. Realistically, the potential loss might be around $8,000 if the price would temporarily drop to $15 per barrel, but the potential gain is much greater. For example, if the price of oil went to $40 per barrel, the gain would be $17,000 per contract. That would certainly help to defray the increased price of gasoline and heating oil.
The major concern about trading futures is psychological -- that people approach it like gambling and get "hooked" on short term trading rather than long term hedging. But stock ownership can have the same pitfalls.