Starting a commodity trading business can be done if the right licenses and registrations are done. However, individuals who wish to start this business must first gain in-depth knowledge about commodity trading. The European economy offers a competitive tax regime and has a well-established legal structure. Both of these are key ingredients in making the commodity trading business a success.
What are the Different Types of Commodities?
Commodities are either grown, produced, or extracted. Four main categories define the commodity market:
- Energy Commodities: This includes petrol products like crude oil and gas.
- Agricultural Commodities: This includes raw goods such as cotton, coffee, sugar, and beans.
- Metal Commodities: This includes precious metals like silver, gold, and platinum, but also base metals like copper.
- Livestock Commodities: This includes live cattle, pork bellies, and general livestock.
Is Commodity Trading Legal in the UK?
Commodity trading is legal in the UK. However, without approval from the Financial Conduct Authority (FCA), brokers are not allowed to practice in the UK. It is a trader’s responsibility to ensure that they only transact commodities with brokers accessible from the UK.
Are Commodities High Risk?
Commodities trading carries a risk as all types of trading do. In addition to standard market volatility, many commodities’ prices are impacted by external things like the weather and politics. Those partaking in leveraged commodity trading are exposed to an even greater risk of losing more money than initially expected.
How to Start Your Own Commodity Trading Business
Starting a business in commodity trading can be done easily. As long as the rules and regulations are followed and there’s a good understanding and knowledge about commodities, it can be done. Here are the steps to follow to open a commodity trading business:
Understand the Basics of Commodity Trading
Before starting a commodity trading business, it is important to have a deep understanding of the commodities sector. This knowledge varies from politics to the weather as both can have an impact on the commodity market.
Even though there are no formal educational requirements for commodity training, there are certain qualifications and education individuals can get to increase their knowledge and experience in the commodity training sector. These qualifications can include a degree in business or economics.
Certification and Licenses
After gaining the needed knowledge and experience, the next step would be to get the necessary certification and license for commodity trading. The reason why there are license and certification requirements is to make sure individuals have enough knowledge of the financial market and regulations.
Future commodity brokers can register with the Financial Conduct Authority (FCA) to get a licence of approval. The Financial Conduct Authority can require individuals to gain additional certifications like the Chartered Financial Analyst or to complete the Chartered Institute for Security and Investment exams.
Register the Business
The next step would be to register the commodity trading business. The business registration can be done with Companies House, where you can incorporate a limited company or a limited liability partnership. Registration with HMRC for taxes is also necessary. Other considerations include renting a serviced office, setting up a website, and opening a commodity trading account for the business.
How to Trade Commodities
Once the necessary licenses and business registration is done, trading can begin. The most popular way to trade commodities is through futures contracts, which are a commitment to buy or sell a commodity on a set date in the future at a set price. Trading in commodities, and futures in particular, is typically a shorter-term investment. Futures contracts are used by buyers and sellers to ‘lock in’ the price of a commodity now, for delivery in the future.
For example, if an airline company believes fuel prices will rise, it could ‘hedge’ this risk by buying a futures contract in oil. If the oil price rises, the airline company benefits from a lower price than it would have paid for oil in the ‘spot’ market at that date.
However, investors also use futures contracts to speculate on commodity prices. Some commodity prices fluctuate significantly over a short period. This creates the opportunity for either large profits or losses.
What are the Different Types Of Trading Methods?
There are several ways individuals can trade commodities. Here are the main methods of trading commodities:
Invest in Physical Commodities
One of the ways to invest in commodities is to go directly to the source and purchase the goods themselves. Over time a buyer can be found and if the price rises brokers can then pocket the difference.
However, this might not be feasible as they have to go and find a producer and seller of a commodity to buy the goods from. The goods will also have to be stored as it is a physical product.
Trade Commodity Futures
Futures are contracts where a seller agrees to sell a specific quantity of a certain commodity at a fixed price on a specific day in the future. If the commodity price rises between the purchase date and expiration date of the contract, the trader can sell the futures contract at a profit. If the price falls, the trader will make a loss.
One of the benefits of trading commodity futures is the use of leverage, which allows traders to make a larger trade than what they could purchase outright with their available funds.
Commodity Options
Options allow brokers to trade on the changing value of a commodity without having to purchase the commodity outright. There are two types of options contracts which are calls and puts. The owner of a call option has the right to buy a commodity futures contract at a set price on or before a certain date. The owner of a put option has the right to sell a futures contract at the set price on or before the expiration date.
Do Day Traders Pay Tax in the UK?
According to the UK government’s manual on capital gains taxes, traders can be subject to Capital Gains Tax (CGT) on profits received from commodities trading. Trading activities that might have tax include derivatives like contracts-for-difference, futures, or physical transactions with products like precious metal bullions.