Online trading technologies have made it possible for common people to trade in the markets. It has increased participation of the market which was previously only open to few institutional investors.
Thanks to the internet and electronic terminals, trading has never been so easy for retail investors.
Gone are the days when traders had to rely on their brokers’ advice. Now people across the globe trade in various indexes, currency pairs and other financial instruments using a mobile app or web services.
Trading in financial instruments has become popular investment avenue in African countries. For instance, South Africa’s stock exchange JSE reported equity market trades of over $352 billion USD in 1 year period November 2019 to 2020.
It grew 13% YoY while volume of trades grew 42%. While South Africa’s forex market has a volume of over than $12.64 billion dollars per day.
Nigeria too has also witnessed a dramatic growth in trade volume and ranks second only to South Africa. In 2020, local exchange NSE reported growth in market volume with interest from local investors. Recent figures on NSE reported Equity Cap as N21 trillion Naira.
In fact, there are currently more online traders in Nigeria than South Africa. Today many apps such as Corrywise, Piggyvest and Hotforex in Nigeria provide trading services in wide range of instruments including forex, stock-indexes, commodities and crypto-currencies.
But for their safety, new investors must know below essential facts before investing.
1. Online Trading has its risks and disadvantages
The price of trading instruments such as shares and forex reflect the prevalent market conditions and sentiments.
For instance, a bumper quarterly sales volume can create buying interest, and make a company’s share prices reaching new highs on the stock-exchange. But a disappointing performance can cause its share prices to free fall.
So, gaining from your investments depends upon a lot of factors, some are manageable while some beyond your control. It’s better to be aware about associated risks with online trading.
Market Risks: It involves day to day price movements of trading instruments. In a volatile market condition, the share-prices of even good performing companies can fall dramatically if the overall market sentiment is of risk aversion, as an example.
Instrument Risks: Equity prices can rise and fall are dependent on prevailing market and economic conditions. Bond prices are dependent upon interest rate, a fall in interest rates can affect its prices. Prices of derivatives depend upon performance of its underlying assets.
Broker Risk: Trading with a well regulated online broker is important. Unregulated brokers can cause investments going sour or worst they could run away with the investments.
System Risks: A weak internet or slow processor can cause delay in placing orders, or you may end up investing twice due to this. Always wait for the confirmation message after each order.
Addictive Nature: Many studies show that online trading can be as addictive as gambling. Traders may end up investing in risky stocks or other risky instruments to make a larger gain.
2. Profits are not guaranteed
If you have observed the capital market closely, you must have seen that how it responds to changing market conditions.
Financial crises like Asian 1997 or US Subprime Lending 2008 wiped out the entire investments in just few days. Even the giants of Wall Street didn’t see it coming.
Recently, COVID-19 pandemic also had similar effect on major stock exchanges. As major economies GDP dwindled, those countries dependent on oil were severely impacted.
Any external political, natural and supply-demand factors can cause upheaval in stock exchanges and other financial markets. This can result in significant losses for many traders & investors. So, it’s important to know that online trading can be profitable, but profits are not guaranteed.
- Different Instruments have different risk and rewards
Regardless of the investment type, there is always a risk of losing money. Knowing potential risks and rewards associated with instruments is important for all kinds of online investments.
Stocks: Stock trading remains widely popular and for a good reason. Long term investments in blue-chip companies can yield good result over years, even their stock prices remain relatively stable. However, trading in penny stocks or new startups can be risky.
Bonds: Bonds are considered relatively safe than other kinds of instrument trading. AAA rated bonds (mostly issued by governments) guarantee a yearly interest return plus principal amount. However, there are also “junk bonds” which although promise higher returns, are more risky than government bonds.
ETFs: ETFs are exchange traded funds containing a bunch of securities such as stocks, commodities, bonds, or a mixture of all.
For example, Global X MSCI Nigeria ETF tracks the performance of top 21 stock holdings. Although considered a safe investment, the ETF’s value is dependent on how well the underlying stocks are performing.
REITs: A REIT owns or manages a bunch of real estate and commercial properties such as offices, hospital buildings, shopping malls, etc. Its value is very much dependent on the demand of commercial properties. A financial crisis like Sub-Prime 2008 can also impact the health of a REIT.
Forex Trading: Forex market is the biggest financial market in terms of volume, but highly volatile. Without adequate knowledge and safe use of leverage, currency trading can be a loss-making pursuit.
Commodity Trading: It involves trading in different kinds of metals (gold, silver, etc.), oil and farm produce (cocoa, wheat, etc.). The profit and loss depends upon the traded commodity instrument type, which is dependent upon supply-demand, and many other external factors.
- Leverage and Margin Trading is Risky
The availability of higher leverage can be attracting for many online traders. Leveraged products such as Forex, CFD and Options enable users to trade a large position with a very minimal amount (margin money).
For instance, suppose you’ve entered into a buy EUR/USD currency trade using 1000:1 leverage ratio when 1 EUR = 1.36 USD. Required margin = USD100, Leveraged amount = USD100, 000.
On the same day there is a news that cases the dollar to appreciate in value, causing fall in EUR value (1 EUR = 1.35 USD). Your loss in this leveraged trade is USD 1000. Now you have to supplement your trading account with another USD 900 to compensate your losses.
Similarly, other leveraged products can be very risky for new traders. Using no leverage or in the ratio of 10:1 is perhaps a better idea for new traders.
- Choosing a reputed Broker Matters
There are instances when unregulated brokers closed their window abruptly or ran away with investors’ capital. That’s why choosing a well regulated broker is important to minimize the risks associated with online trading.
Stock trading in Nigeria is regulated by Nigerian Stock Exchange. Choosing a NSE regulated online broker is a good idea.
Similarly, commodity brokers must be licensed by any one of leading commodity exchanges of Nigeria like LCFE, AFEX, NigeriaCommex.
Forex trading in Nigeria remains largely unregulated. However, online forex trading remains popular in Nigeria among retail investors. If you are also interested in trading forex, you must choose the best forex broker in Nigeria like Hotforex or FXTM, that are regulated by Tier I and Tier II regulators like FCA (UK), CySEC, FSCA and ASIC.
- Brokers charge you Commission, Spread and Fees
Spreads and commission varies broker to broker. Spread is the difference between the price you pay for buying and the selling price of an instrument.
Quoted in “bid-ask”, the “bid” denotes the maximum price you can sell, and the “ask” is the lowest price you can buy. Some brokers offer no-spread trading account, however, there can be other hidden charges so choose them wisely.
Another important consideration while selecting a broker is commission. Fixed fees commission charges a particular amount regardless of the size and volume of the trade. For example, USD1 for each trade. In relative fees model, the commission depends upon the size and volume.
Some brokers also charge for unclosed overnight positions. On the other hand, brokerage fees may include deposit and withdrawal charges.
Choose a broker that is transparent and discloses each types of fees.
- Trading Education is important
Learning about different financial instruments and associated risks is crucial for new traders.
Start by reading investment books, join online forums to learn trading.
As with any discipline, mastering financial trading takes time. Be patient, learn the trading fundamentals, practice with a demo account, and devise a trading strategy before entering into trade.
- Demo Account must be used before trading with actual money
One of the best ways to learn online trading is to start with a demo account.
Many brokers provide demo account where you can practice your trading skills without risking any real money. Once you are confident enough and understand the risks, only then you should consider online trading.