Beginner’s Guide on Starting a Commodity Trading Business in the United Kingdom
If terms such as futures and derivatives bring a gleam to your eyes, then starting a commodity trading business might just be for you. The United Kingdom is possibly one of the best places to do so, especially with its ease of doing business and the market possibilities
The major European economy offers a competitive tax regime, has a well-established legal structure and a highly talented, diversified workforce. Both are key ingredients in making your business a success in the making. Hedge your bets by knowing how to set up a commodity trading business in the UK.
Basics of Commodity Trading
Before starting a commodity trading business, it is essential for you to know the ins and outs of the game, whether it is UK company registration or the rich history and the market status of the sector.
One of the UK’s Commodity Trading market’s most important moments occurred in the 1970s with the Brent Crude benchmark, which is still being used and monitored by the traders up to this day. The UK continues this trend of prestige and hosts many global exchanges and trading firms, making it the ideal place for those who have plans on starting a commodity trading business.
The term ‘commodities’ in relation to trading can be defined as unrefined materials that can be bought or sold. Commodities can be soft or hard and include agricultural products, metals, energies such as natural gas, etc.
- Metals. These commodities include gold, silver, platinum and copper. When the markets are very volatile, investors look to put in money on safe-haven assets as such. These precious metals have been very reliable when it comes to price stability, especially gold. Traders invest in precious metals to safeguard their assets from a high inflationary environment or currency devaluation.
- Energy. Investors trade crude oil, heating oil, natural gas and gasoline in the world market. Traders monitor oil prices because these are major considerations in the macroeconomy as they can push up inflation. So, it truly is bad news when reports about supply shortage flood the market. With this, investors should be aware of the changes in production as enforced by the Organization of the Petroleum Exporting Countries.
- Agricultural products. Commodities being traded in agriculture are corn, soybeans, wheat, rice, cacao, coffee, sugar and cotton. Trading such commodities face volatility during the summer months or when weather transitions to usher in new atmospheric conditions.
- Livestock and meat. These include trading of lean hogs, live cattle, pork bellies and feeder cattle.
How to Trade Commodities
Trading is done on exchanges, similar to the stock market, which includes the London Metal Exchange (LME), etc. Whether you make a profit or loss depends on prices rising and falling. This depends on factors such as market demand, global politics, season and weather, etc. You can trade commodities:
- Physically: wholesale markets as either spot trades or forward contracts.
- Derivatively: commodity exchanges with futures and options.
In the world of the commodities market, a spot price refers to the agreed purchase price of a commodity, security or currency with the condition of immediate delivery and payment. To simply put it, the spot rate is the current price determined so the contract will be fulfilled in the earliest possible time.
On the contrary, a forward contract is a promise for the later settlement of the agreement. It refers to an agreement of terms on a present date but the delivery and the payment for the commodity is set at a future date. Forward-buying, as they call it, shields the investor from price fluctuations.
You can take advisory services to know more about commodity trading and a commodity trading company. You can also opt to take company incorporation services for flawless and straightforward incorporation.
Setting Spending Strategies
When starting a commodity trading business, you have to make sure that a sufficient budget is allocated for the venture. With this, it is necessary to conduct a spending analysis so you can integrate your sourcing strategy and competitive strategy. By doing so, your business can review the commodities that can be bought and projected to be purchased by the organization in the future.
You can do your spending analysis by aggregating your total purchases across divisions based on your supplies and supplier. At the same time, this report should also include the following:
- cost of ownership of the commodities, which includes the purchase price
- end-users of the acquired commodities
Basically, it is a report that can help you with managing your finances.
Fundamental Trading of Commodities
Starting a commodity trading business requires you to have knowledge of different macroeconomic developments. This is where the fundamental trading strategy comes in as it focuses on technical and fundamental indicators when transacting. This strategy takes into account the market fundamentals which are usually based on seemingly peculiar factors.
While this strategy aids in trading, remember that it demands more of your time for research. Generally, monitoring chart patterns of the technical side of trading is easier than projecting potential fundamental developments. It will truly test your patience and knowledge as you will go into various data sets and even news reports.
Range Trading of Commodities
This trading strategy is popular in financial market trading as well. Basically, you buy at the support level when prices are at the end of the range. You then sell at resistance or when prices have increased to the top of the range.
Take note that supply and demand affect the positioning of commodity prices. The commodity prices usually reach the top of the range due to strong demand. But you have to watch out as investors will likely sell off when they do not think the prices will go even further.
If investors started selling off amid a good supply of commodities, expect prices to go down as well. You have to sell off and alight the ship before you sink along with it.
Due Diligence and Registration
You can start a commodity trading business in the UK by first doing your due diligence. Your business plan should have scalable and viable information on relevant market research, financial forecast and the type of trading. Your business can be a commodity dealer or broker, each with his or her unique skill sets. You will also need to do research and choose the commodity that you want to trade.
Also, consider how you want to trade, i.e., do you want to invest or trade. This can include exchange-traded funds (ETFs), futures and options and contracts-for-differences (CFDs). Knowing how commodity trading itself works is the key to success.
Registration of your business is done with Companies House, where you can incorporate a limited company or an LLP (limited liability partnership). You will also need to register with HMRC for taxes and ascertain your financial year-end for filing deadlines. Other considerations include renting a serviced office and setting up a website for your business. You will also need to set up a commodity trading account for your business.
Last but certainly not least, do ensure that all licenses and permits are in order before you start your business. In the UK, the Financial Conduct Authority (FCA) regulates commodity markets and firms. This is done in accordance with the Financial Services Act 1986 and the Financial Services and Markets Act 2000. It includes options on financial instruments, futures as well as contracts for difference.
Professional Help for Your Business
If you have a talent for understanding and making smart trades, then commodity trading is a good business to start. 3E Accounting provides professional assistance and guidance on how to set up a commodity trading business in the UK. We are a United Kingdom corporate service provider ready to help you with your company incorporation today.
Our team of experts can assist in all aspects of company formation, including banking and compliance. Contact 3E Accounting today to access an international network of experts and customisable business solutions.