Online Trading is growing in Nigeria, but Investors must watch out for these risks and scams
November 25, 2020448 views0 comments
There has been a constant growth of online trading and major shift of trend to retail investing worldwide since the start of 2000s. Most of the trading has now shifted from traditional channels like phone, trading floors to online trading platforms and most legacy brokers & exchanges have upgraded their platforms to digital technologies and APIs to provide instant quotes and execution.
All major markets, exchanges and brokers now offer online connectivity; this has resulted in increased adoption among retail investors and flourishing ecosystem of online trading apps and platforms.
There have been great improvements in electronic trading technologies with most exchanges developing their own online APIs or outsourcing them to leading financial market companies like Bloomberg or Refinitiv and brokers leveraging inhouse online technologies or existing low-cost platforms to connect to the APIs to offer availability on multiple platforms like mobile, web & desktop.
All this has made possible for low-cost brokerages to operate as they now have low backend cost owing to platforms like Folio Trader for NSE stock brokers in Nigeria, MetaTrader for CFDs & Forex Trading in Nigeria, OST by ChelSoft used by NSE Kenya brokers.
This growth has increased many folds this year due to Covid-19 pandemic and resulting volatility which made it attractive to some investors and speculators, while most took out their money from the volatile markets, they also added to the trading volumes.
Many global brokers have reported almost up to 200% growth in their volumes, new client numbers in Q2 of 2020 namely Etoro, IG, Robinhood etc.
Nigeria too has seen growing interest in online trading from youth and traders with demand for retail trading and investing in stocks and forex. Many of whom are entering the investing scene for first time.
There have great improvements in local trading technology and online platforms. Many new trading and investing apps have started in Nigeria with an option to invest in markets through mutual funds, stocks, forex and cryptos.
But besides this, there is a growing concern of various risks and scams associated with online investing and trading that new investors particularly need to watch out and most of them are not even aware of until they become victim of.
Risks, Scams & Unknowns of Online Trading
Risk of Losing money
This is most common risk of Investing or trading in the financial markets and investors must be aware of that their investments might fail or not go as planned. Investors must only invest their money if they are open to the possibility of losing money or that they are willing to part away with their money.
The returns are not guaranteed in any of the market investments or instruments as it is dependent on numerous factors or uncertainties of the market. This is true for all instruments whether its Mutual Funds, ETFs, Stocks, Derivatives, Cryptos or Forex.
You must know that even experienced traders lose money. There have been situations or instances where even thorough analysis of the market has not worked out as planned. Like in Covid-19 turmoil on many market instruments, traders lost billions on the volatile markets.
Remember, investors should only invest the funds that they can afford to lose, one must never invest their life savings or critical money. You must set aside funds for emergency and other needs and only invest surplus money.
Falling in trap of Fake Investment Schemes
This is the most common mistake made by new investors. Many inexperienced investors have fallen into trap of investment schemes designed to fool individuals into giving their money to scammers. This is often done by luring people in the name of market instruments like Stocks, Forex or Bitcoin or anything made up.
They will say that they know the trades of the market and they have this much experience in investing and they know which stocks or forex pair or coin will go up. And they will claim to offer huge impossible or unreal returns like 100%-500% per month or per day.
Sometimes they will come up with unknown instruments that only they know of which no one has heard of. No real market can offer more such high or consistent returns.
Common thing is that they promise to offer huge returns in little time.
In reality, they are just Ponzi or Pyramid schemes disguised in the name of capital market investments where they don’t invest your money but may pay initial investors from deposits of new investors. Initial Investors who are paid will think that investments are working and tell others to put money or themselves put more money. In the end the whole scheme will fail and scammer will run with remaining money.
It is advised to stay away from investments you don’t understand and never invest in anyone offering huge returns.
Trading with Bad or Unlicensed Brokers
Most of the financial markets & instruments are regulated by market regulators in each country. There are regulated entities licensed by these regulators through which one is supposed to invest in the market for their safety.
New investors are often not aware of the regulations or restrictions imposed on the financial markets or instruments in their country. So, they often end up investing with unlicensed brokers where they experience unsafe & unfair trading conditions and they end up losing money due to that or they are even subjected to abuse by the brokers like there are some brokers who limit withdrawals or close accounts without reasoning. And investors are left with no grievance redressal in case of these misconducts.
The market regulators have their policies to ensure safer trading environment for traders which licensed brokers have to abide by. And they also ensure investor protection, grievance redressal in case of bad practices of the brokers like taking opposite sides of trade, stop hunting, platform freezing.
Regulated brokers have to constantly report all trades of the regulator for transparency and they may be fined for irregularities or misconduct or even risk losing their license in some cases.
In Nigeria, Stock & commodities markets like NSE, NCX, AFEX, LCFE are regulated by SEC. While CFDs and forex trading markets in Nigeria are not yet regulated.
Stock traders must only trade with NSE registered dealing members and CFD traders must choose popular Nigerian forex brokers that are licensed by foreign top tier regulators like FCA, ASIC, CySEC or FSCA.
Market & Instrument Risks and Uncertainty
Financial markets and its instruments are inherently risky. There are multiple uncertainties in the markets that are dependent on various complex factors which are difficult to predict even for experienced traders.
Market movements & instrument prices depend on various factors including economic, political, supply & demand etc. which increases its associated risks.
Financial instruments like ETFs, derivatives are affected by the underlying markets performance & risks and instrument specific risks like one resulting from use of excessive leverage.
Recent volatility in the financial markets resulting from Covid-19 impacted almost all the stocks, commodities and currencies. Many investors lost money due to this, some even lost millions in single day.
Investors must understand the risks of the instruments & markets they are investing in before they put any money. And must devote time in learning and using risk management strategies and tools like stop loss.
If possible, test your investment strategy on demo before trading with real money. Use no or safe leverage of 1:2 whenever you are trading to reduce the risks. Never use an underfunded account to trade.
Learn about risk to reward ratio, an ideal ratio is 1:2 or more where you risk money for at least 2 times returns.
Investing long term and diversifying the investments can reduce your risk horizon.
Lot of Unknowns and No Guaranteed Returns
Investing and Trading has a lot of knowns due to market uncertainty and risks involved and it should never be considered as a sure shot way of earning money.
No one can guarantee returns from any financial market or financial instrument.
Investors should be aware of this fact and only invest what they can afford to lose.
Remember these before trading or investing online
Investing is risky and it is not a get rich quick scheme.
One must not invest what he/she can’t afford to lose and only invest according to their risk tolerance.
Never invest on other person’s advice or take unsolicited advice from someone. Most importantly never let anyone invest for you.
Only invest in what you understand.
Investors must understand &educate themselves about all the workings, risks of an investment and gain adequate experience & proficiency on demo before they invest any real money to avoid common investing mistakes. And use risk management to reduce the risk to minimum level.
Beginners must only invest in safe instruments like mutual funds.
Lastly, always use licensed brokers or entities to invest or trade.