Online trading

How does online trading in Nigeria work?

Gone are the days when you had to call your stockbroker by phone to place an order. Not only was it very expensive, but it also took a long time.

This old practice has been superseded and brokers are now deploying online trading applications that reduce human intervention and allow you to trade on your own. This dramatically reduced costs and put the power in the hands of the investor. These apps are accessible even to village dwellers who may not be tech-savvy. So they wonder how online trading and investing works.

In order to invest, you just need a stockbroker to link to the stock exchange, download the brokers app, register and open a client account with the broker, and then start investing or trading. There are over 328 stocks listed on the Nigerian Stock Exchange (NGX) to choose from and you can also choose from several SEC-registered stockbrokers. It takes days at most. (T+3) for the stock to be delivered to your account after the stock has been paid for.

Currently, only retail equity investing and trading is regulated in Nigeria and retail forex trading is not yet regulated by the SEC. Retail traders therefore do so at their own risk.

Choose a brokerage

A stockbroker connects you to the stock exchange because you cannot buy stocks directly from the stock exchange. You need to choose a stockbroker that has a good trading app that has strong security features like two-factor authentication (2FA), charges low fees, and so on.

To view a list of licensed securities dealers, visit NGX’s website at and see the “Trading Licensee Directory” or visit the SEC’s website at www.sec and check out the “Capital Market Operators Search Page”. . You can also email SEC via email address: [email protected]

Every Nigerian investor should download the Nigerian Stock Exchange (NGX) application known as “X-Mobile” from the online app store of their phone. The X-Mobile app gives you a market overview and an updated list of all available securities listed on the Nigerian Stock Exchange. The X-Mobile app is not a trading app, but it gives you the information you need and connects you to all stockbrokers in Nigeria when you click on the “trading” button in the menu.

The NGX publishes a performance report that rates stock brokers on the value they bring and the volume of their transactions in Nigeria. This report is available and updated regularly on the NGX website. This might help you when considering choosing a broker.

Safe Forex Brokers Nigeria discovered in their research on Forex trading in West Africa that there are many fake forex brokers and Ponzi schemes that target investors and traders in Nigeria. Forex related scams are quite common in Nigeria. Although forex trading is unregulated in Nigeria, there are still over 200,000 forex traders in the country. All of these traders trade through foreign regulated CFD brokers.

As there is no regulation related to retail online forex trading but very popular among young investors, many scammers lure less knowledgeable investors to their Ponzi scheme in the name of forex investing and trading. other markets.

As an investor, you should also be wary of Ponzi schemes that take money from new investors to pay existing investors. When these Ponzi scheme operators discover that they can no longer recruit new members and people start to suspect that they are a fraud, they simply close up shop and run away with people’s funds.

Investors should also be aware of investment pyramid schemes which work like Ponzi schemes but where you have to go and recruit new members to be below you in the pyramid so you can get a commission.

You can tell an investment is a Ponzi scheme when they are not registered with the SEC, they promise high returns but don’t warn you of potential risks, they operate secret social media groups on WhatsApp, meta , etc., they tell you to change the description of your bank transfers/payments to avoid regulatory audits, and they force you to recruit new members.

It is important to only trade with brokers approved by the SEC so that you can claim compensation from the Investor Protection Fund (IPF) if your broker goes bankrupt or chooses to be fraudulent. The SEC requires capital market operators to renew their license every two years.

Opening an account

After choosing a stockbroker of your choice, the next thing is to register and open your client account. Different types of accounts such as personal account, joint account, business account, etc. are available. You will need to provide the following:

  • Means of government identification (national ID card, driver’s license, international passport, permanent voter card, tax clearance certificate, etc.)
  • Proof of address (electricity bill)
  • Bank Verification Number (BVN)
  • Download signature
  • Your bank account number (to be linked to your investment account)

You should also be asked if you want to opt for Direct Cash Settlement (DCS). When you accept a DCS payment method, the sale proceeds are paid directly into your nominated bank account instead of being paid into the broker’s bank account before they disburse it to you. The SEC has made the implementation of DCS mandatory for all securities dealers.

You can choose to open a cash account or a margin account. A cash brokerage account means that you do not take out any loans from your broker to invest in securities and that all of your securities will be paid for 100% with your own money. A margin brokerage account, on the other hand, means that you intend to take out a loan to invest in securities.

Not all securities are tradeable on margin or can be purchased with margin loans. So, check with your broker for their list of margin securities. Many stockbrokers such as Meristem Securities, Morgan Capital, etc. offer margin accounts to their clients.

Stockbrokers such as Meristem have a minimum account opening requirement of N10,000 and some like CardinalStone Securities require N1 Million to open an account to invest in stocks and at least N50,000 to invest in their mutual funds investments and their Structured Investment Plans (SIPs).

Before investing in stocks, it is advisable to analyze the books of the company to ensure that their assets cover their liabilities as well as the shareholders’ equity.

You don’t want to invest in a business that isn’t growing and you’re making a loss. If that sounds like too much work, you can simply buy shares of exchange-traded funds (ETFs). ETFs are a basket of securities and they contain shares of different companies and are managed by professionals. Buying ETF stocks means you are diversifying and owning a stake in all the companies in that basket.

Margin loan

This means taking out a loan from your stockbroker to buy securities. Usually, collateral is required in the form of stocks or cash and these loans generate interest that needs to be repaid regularly.

Margin is primarily used by online stock traders looking to buy a stock, wait for the price to rise, and then sell to make a profit. Your broker will assess your financial situation and give you a loan to value ratio (LVR) which will determine how much you are able to borrow.

An LVR of 1:2 means you can borrow twice your initial down payment. If your initial capital is N100,000, an LVR of 1:2 means you can access a loan of N200,000. However, you will need to fund your account with an initial margin calculated as a percentage of 1/leverage in order to in this case ½ or 50% of the loan amount.

In this example, you will need to fund your account with 50% of N200,000, or N100,000. You can choose to pay the initial margin in cash or acceptable shares. Some brokers such as Morgan Capital only accept shares of blue chip companies as initial margin.

Your initial margin must not fall below a certain point called the maintenance level. If during the trading process you continue to experience losses, this reduces your initial margin and once it drops below your maintenance level (which is usually set by your broker), a margin call will is sent to inform you to come and pay. additional cash or securities to regularize your account and bring your initial margin to a point above the maintenance level.

Failure to meet a margin call means that all securities you have purchased on loan will be sold at the next available price, whether the available price is high or low, and your trading positions will be closed so that the trading agent exchange can recover the loan granted to you. You will end up losing money if this happens.

To avoid a margin call, invest the borrowed funds in assets of profitable companies whose prices will not fall and expose you to losses, use risk management tools like stop orders, know your maintenance margin point and keep funds readily available in case of a margin call. It is always best to avoid using margin whenever possible.

Risk management

When you invest or trade, there is a risk that the market will move against you, which can be managed using several orders, some of which are:

  • Market Order – This is an order from a client for the broker to sell or buy a specified amount of a security at the current market price or at a specified price.
  • Stop Order – An order to a broker to close a client’s position and trigger a market order at the next available price once a predefined “stop price” is crossed.
  • Limit order – This is similar to a stop order but here the market order is for a specified price and not the current market price.