A primer on commodities; Facts first is first rule if you opt to trade in futures
Suddenly there's a crisis in ''Uzengi.'' The railroad, which transports ''caramedylemn'' - essential for the nation's new jet fighters - has been sabotaged. And, then, before you can find Uzengi in the Atlas, a man is on the phone talking to you about caramedylemn futures, traded on the Brussels bourse. ''This is the time to become a millionaire,'' he says.
While caramedylemn and Uzengi exist only in this article, this little scenario is not unique. Investors are daily bombarded with calls - some from legitimate brokers and some from fly-by-nighters - to invest in commodity futures. But, how do you decide whether or not it's time to ''roll the dice with the big boys?''
According to to Laurie Buchanan, director of the office of public information , the Commodity Futures Trading Commission (CFTC) there are a lot of steps an investor can take to make sure he is not investing in something fictional like caramedylemn futures. To begin with, she says, make sure ''you get the facts'' about any commodity operations. ''If someone says they are sending a messenger over to pick up money from you,'' Miss Buchanan states, ''tell him you must have something in writing. Sometimes people use messengers to avoid mail fraud.''
Furthermore, she says, people shouldn't send money to someone based on a ''cold call.'' Check out the reliability of the firm you're dealing with. Ask questions of the salesman and get information in writing. Ask for bank references and find out how long the company has been in business. Get the company to disclose - in writing - financial information about itself and its commission charges and fees. Find out how much you can lose in the investment and what the risk is.
The CFTC, in an effort to crack down on fraud, has sent out a brochure to chambers of commerce, newspapers, and state and local law-enforcement officials, warning them of things they can spot that may point to fraud. For example, if a company suddenly installs a large number of WATS telephone lines, they may be setting up a ''boiler shop'' type of operation. This type of firm makes high-pressure calls to individuals all over the country, touting commodities or other hot ''investments.'' Eventually, they close up shop, leaving the investors with losses.
Or, the CFTC says if a company suddenly opens up some bank accounts with foreign sounding but glamorous names, it might require watching. And, if it suddenly begins to do a lot of advertising in a local newspaper, without any history in the area, it also might justify raised eyebrows.
Suppose, however, the firm is an established firm. And, you think you want to invest in commodities in spite of all the warnings you have heard about people who have lost fortunes (as well as made them) in the commodities markets. (More people lose money in the commodities markets than make it. Nonprofessionals are especially vulnerable to losses.)
If this is the case, be prepared for a fairly thorough check of your financial affairs by the brokerage house. Although each brokerage house has its own financial requirements, expect some fairly stiff rules. For example, at Bache Halsey Stuart Shields Inc., Mac Fellman, first vice-president, commodities division, says the firm has a prerequisite of a net worth of $100,000, not including your home or cars.
''To be in the markets with less than $20,000 to $25,000 of money to speculate with is naive these days,'' says Mr. Fellman. However, an individual must post only a minimum of $5,000 in cash with Bache to be able to speculate in commodities. Most other brokers have similiar requirements.
Once you decide to speculate in cotton, or wheat, or soybeans, there are various ways to do it.
An individual can decide on his own what commodities to invest in. Then, all it requires is a call to a broker to execute a trade.
Or, an investor can deposit money with a broker and give the broker limited trading authority. Sometimes this works, sometimes it doesn't. Some people consider it akin to financing a broker's gambling trips.
A third method is to invest in a commodities fund. This is usually a limited partnership arrangement. The advantage of this is you can lose no more than you put up. In the first two arrangements, your losses potentially are unlimited.
If you do decide to make your own decisions, what kind of temperament do you need?
According to Mr. Fellman, a veteran of 27 years of commodity trading, ''you must have the ability to analyze the markets and the psychological ability to live with a volatile situation and sleep at night.. . . You must be objective and pragmatic and be able to cut bait and run if the idea turns sour.''
Mr. Fellman adds, ''Over the last eight months the markets have been so choppy, it's been difficult for even the professionals to be consistently profitable.''