Commodity Brokerage Firm Establishment Guide

Feb 23, 2024 By Triston Martin

A commodity brokerage business may seem daunting at first, but planning and understanding the requirements may save you a lot of time and aggravation in the long run. An "introducer broker" (IB) is a commodity brokerage business specializing in futures trading. The National Futures Association has many Individual Brokers (IBs) (NFA).

Requirements for Registration

After passing the Series 3 exam, the first step in becoming an IB is registering as an IB with the (NFA). 2 APs, or related persons, must be listed on the company's website. APS are often brokers. As a solo entrepreneur, you must become an AP if you want to succeed. There are fees to pay and documentation to fill out when you register.

IB Business Plan

A business plan is a need for each new company. To do business, you'll need an office that's open and ready to go. To make enough money to keep the firm going, you need to figure out how to get customers on board. Earnings from the start serve as a foundation for future growth. To establish a business, you must have a strategy for raising capital and finding new customers.

Become A Commodity Broker

Those who work as commodities dealers earn a lot of money. A basic compensation of $100,000 to $150,000 was earned by brokers with less than three years of experience in 2013. If you're ready to put in the time and effort, you may earn an average base pay of between $200, 00 and $350,000, but you'll need to complete a rigorous license application procedure.

The Essentials

Commodity brokers should have a passion for trading commodities and be good at selling. It is crucial to think about sales since you must acquire accounts and build a clientele. There are much fewer commodities brokers than stockbrokers or licensed securities agents.

Become A Licensed Commodity Broker

The National Futures Association (NFA) requires that every commodities broker be registered as an "affiliated person" and get a license. The candidate must pass the Series 3 examination to obtain that license. It's available on the NFA's website in an outline form. The exam consists of two sections: one for general understanding of the futures market and one for rules and regulations. This is a critical section of the exam. Customers' treatment is a significant focus of this section.

A Commodity Broker's Work Environment

Before beginning the licensing process, the candidate must already be employed in the commodity trading industry. You should seek a brokerage business specializing in commodities if you want to trade commodities. Introducing Brokers (IBs) are commonly referred to as such. Direct employment with an FCM, or Futures Commission Merchant, is another option. In Chicago or New York City, the majority of FCMs are based.

Getting Down to Business

As a commodity broker, you'll need the ability to investigate commodity markets and the expertise to trade commodities. Commodity brokerage businesses often have in-house research departments conducting in-depth analyses and providing trade suggestions. Because of this, sales abilities are the most crucial trait. Commodity trading is best done in Chicago. One of the world's largest commodity exchanges, the CME Group, is based here.

Bull and Bear

In the commodities market, things go up and down all the time. There is a lot of interest from an ever-expanding investor community during bull markets and many opportunities for new brokers to get started—business contracts during weak markets. Investors were drawn to commodities during the bull market from 2003 to 2012 when prices climbed steadily.

Commodity Trading's Advantages

Commodity trading has several advantages. Examples will help us better comprehend.

· Hedging hazardous geopolitical events

As a result of the difficulty in obtaining and transporting raw materials to the factories where they are turned into completed items, geopolitical events such as disputes, riots, and wars interrupt the supply chain.

· A highly leveraged facility

Futures and options on commodity derivatives, such as futures and forward contracts, offer significant leverage. You may control a significant position by paying only 5 percent to 10 percent of the contract value as an upfront margin.

Commodity Trading Disadvantages

When considering whether or not to invest in commodities, one must be informed of its downsides and its positives.

· Leverage

Having too much leverage may be dangerous. With leverage, you may take on a significant stake with a bit of initial investment. A 5 percent starting margin means you may purchase Rs 1,000,000 worth of commodities futures with only Rs 5,000. A small change in the contract price can significantly affect your profits or losses.

· Volatility

Commodity prices are very volatile and are influenced by various variables, including supply and demand. Commodities' supply and demand are inelastic. Price inelasticity refers to the fact that although the price of a commodity rises or falls, its supply does not vary.

Commodity-producing activities such as cultivating new crops, extracting natural gas from under the surface, and extracting iron from iron ore reserves need time and effort.

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