Q: Scams - My son-in-law is exploring the idea of futures trading...Any advice you could provide would be most appreciated.
By Ric Edelman
Question: My son-in-law is exploring the idea of futures trading. He has a friend telling him how awesome it is. The firm he’s been speaking with invokes their faith in Christianity as a huge selling point. My SIL is a great guy but is obviously being swayed by this “wonderful opportunity to make a ton of money.” He’s not happy in his job so he’s looking for a new direction and feels this is very attractive. Any advice you could provide would be most appreciated.
Ric: I am very concerned that anyone would seek to engage in that enterprise.
One of the most common investment scams, according to federal regulators, is “affinity fraud” — where crooks attempt to entice unwary victims by acting as dutiful members of a religious congregation. One of the most abusive areas involves scamsters who invoke religion or the name of God as the basis for whatever it is they are peddling. In these scams, there is strong emphasis on God and the ability to obtain quick riches, without devoting much (or any) attention to how the business actually operates. I do not know if the organization your son-in-law is considering is a scam, but there are enough warning signs on its Web site (which you provided me) to raise serious concerns. (For example, there are a number of testimonials from people claiming to have achieved success; testimonials are prohibited by the SEC and FINRA because they can be highly misleading.)
Scam concerns aside, the very idea of engaging in options, commodities or futures trading is absurd. Such trading is a zero-sum game — meaning that for every investor who earns $1, another investor loses $1. This is because every trade has a buyer and a seller — one will win, the other will lose. It’s like a poker game: At the end of the evening, there’s no additional wealth created; the money is merely redistributed among the players. (This is vastly different from the stock market, where each investor can win: I buy a stock for $1 and sell it to you for $2. You then sell it to the next person for $3, and so on. Options, commodities and futures contracts — because they have deadlines after which the contracts expire, worthless — do not enjoy this fundamental aspect of capitalism.)
Worse, your SIL must not be fooled into thinking that his odds of winning are as good as 50/50, even though I said there’s one winner for every loser. The actual odds of winning are actually much worse than 50/50 because of trading expenses and taxes. On a net basis, only about a quarter of those who attempt such trading are actually profitable — 75% or more lose money, and most of them lose all the money they invest.
And worst of all, some lose even more than they invest. That’s because trading is a leveraged activity, meaning investors borrow money when investing. They might invest $10,000 but actually purchase $100,000 worth of underlying securities — meaning their losses can be far more than the $10,000 they invested. More than one household has gone bankrupt as a result of options, futures and commodities trading. It’s really little different from gambling in a casino.
The fact that your SIL is interested in improving his financial situation is admirable. The way he’s going about it is scary.