Commodities: The New Tech Stocks?

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While the stock investor usually can only lose the money he pays for shares (or double if he's using leverage), the commodities investor can lose 20 times his money or even more.

The second reason commodities trading is risky is that there's no typical direction to the markets. The stock market tends to go up over time, though, of course, there are booms and busts. Not so with commodities, where prices depend on a complex nexus of supply and demand, from geopolitical events and the weather to speculation on daily news headlines and analysts' technical charts. A trader navigating this minefield needs a deep understanding of these dynamics because the competition can be cutthroat. "Commodities trading is a zero-sum game," says Wyss. "The only way you make money is to be smarter than the other guys doing it. Since they've been at it a long time, your odds aren't good."

Sophistication a Must

That's not to say investors should avoid commodities entirely. Wyss and others point out that large institutions and sophisticated investors include commodities in their portfolios, as long-term investments that can help boost returns and dampen overall volatility. Individual investors can use the products for the same purpose if they're careful and take a long-term perspective. Short-term commodities trading and speculation are the most dangerous.

GoFutures is the company that's currently advertising on the Internet for 99¢ trades. When investors trade oil or other commodities, they're typically trading not the product itself, but rather futures or options contracts on the product. A futures contract is an agreement to buy or sell a product at a particular price sometime in the future, while an options contract is the right, but not the obligation, to buy or sell a product for a fixed price at some point in the future.

Alex Tayebi, senior vice-president of San Jose (Calif.)-based GoFutures, says that "the whole 99¢ thing is pretty catchy." Roughly 75% of his clients are self-directed commodities traders and the remaining 25% are advised by brokers at his firm. With a minimum investment of $2,000, an investor can get started on his or her own commodities account with GoFutures, which recommends a minimum of two to three years of trading equities and one year trading futures.

Internet-Driven Push

Tayebi says that his clients are both "new guys" and "pros." Most of the self-directed clients are the "new guys" who are less experienced in futures, and Tayebi himself says he doesn't think commodities are for the ill-prepared. "I don't recommend it to rookies," Tayebi says. For those who come to his company without much experience, GoFutures assigns an adviser to keep watch and assist if necessary. But he says that in the end self-directed customers make their own decisions.

Ads for dozens more companies appear when the search terms "commodities trading" are entered in a search engine. Like GoFutures, RJO Futures markets to prospective clients using Google (GOOG) ad search as well as print, television, and direct mail marketing. The Chicago firm, a division of R.J. O'Brien, a 93 year-old futures trading company, offers free information about commodities on its Web site and a variety of options for clients from self-directed to advised and fully brokered accounts. A minimum of $5,000 is required to trade futures.

About a quarter of the company's self-directed clients are newcomers to commodities, says marketing director Guy Swartz. He says that he believes it is possible for retail investors to benefit from the volatility of commodities—as long as they understand that the stakes are high. "I believe there is a way for the retail person [individual investor] to enter into this market at a pace that can provide possible success," says Swartz. "It's true that the volatility here is extreme, and there's a huge learning curve here. Education and hand-holding as a new investor gets his or her wings is the proper way to bring someone in."

"Potentially Large Losses" Loom

Douglas Carper isn't convinced. He's a veteran commodities trader with more than 30 years under his belt who now runs DEC Capital in Lincoln, Neb. He's posted some glitzy returns for his investors, including a stretch last year where he doubled their money by betting that corn prices would rise. But he says newcomers stand little chance of profiting from commodities and could lose much more than they expect.

"Most people are likely to gloss over fine print and plunge right in," says Carper. "It's a lot of potentially large losses to people without capacity to absorb risk—and far greater losses to accept than they ever expect."

Herbst is a reporter for BusinessWeek.com in New York.