The pandemic has accelerated the growth of online commerce around the world. It is estimated that millions of new traders have entered the markets in the past 2 years.
The trading of Meme stocks like the “Gamestop” stock by “Reddit Traders” is an example of how the retail community is now battling against big hedge funds.
The ease of access via the internet is one of the reasons why many young traders are flocking to trading via their smartphone. But many of the new traders are trading risky instruments that they don’t fully understand,
Most brokers don’t properly warn about risk, while some even tell you how “easy” trading is. This is very risky for obvious reasons.
Online trading is not an investment
Before going any further, we need to differentiate between trading and investing because people confuse the two.
Trading involves buying an asset with the intention of selling it as soon as the price appreciates. Traders hold securities for less than a year and sometimes a few hours.
Online trading can be done in many markets like stocks, forex, etc.
Investing, on the other hand, is buying and holding an asset with a view to benefiting from it in the future when it grows. Investors hold the securities for more than a year. That’s not to say investors aren’t selling, but they might sell an asset when they want to realign their investment portfolio and not for a quick profit.
Investors are mainly found in stock markets. For example, an investor who buys the shares of a company is a co-owner of this company. A stock trader, on the other hand, only seeks to profit from the rise or fall of a stock’s price.
How does online trading work?
A trader trading in Canada needs a licensed broker to transact. A trader usually goes through the following procedure.
You will find that all of these steps are very simple as brokerages try to encourage traders to sign up and trade a lot. But it’s very risky. But, let’s first see the steps involved.
#1. A brokerage firm
IIROC is the securities regulator in Canada. All brokerage firms accepting clients from Canada must be licensed with them.
#2. Open a trading account
Most brokers offer different accounts.
For example, a broker may allow you to open individual, joint or corporate accounts with brokers. You normally need to upload the following documents to the trading app for KYC:
- Means of Identification – International Passport (must be translated if not in English or French), Driver’s License, Enhanced Driver’s License, Canadian Military ID, Government Issued ID, etc
Once you have completed all the documentation and uploaded the above documents, verification will take place, your account will be approved and you can go live.
#3. Fund account
It’s quite simple. The money in your account will be used for trading. Most Canadian brokers allow funding of your trading account by debit/credit card or bank transfer.
#4. Place trades
After funding your trading account, you can place orders.
For example, if you trade stocks, the Toronto Stock Exchange offers over 2,231 listings to choose from.
You can buy shares of any company and keep your position open until the price rises, then you sell the shares and make a profit.
For those who trade forex, your broker will require you to make an initial margin deposit into your account which you can use to start trading.
The amount of initial margin may depend on the volatility of the currency pair you are trading, the type of account you operate (gold, standard, etc.), IIROC margin requirements at the time (which change from time to time) etc. .
What could go wrong?
There are actually a lot of things that could go wrong.
#1 Scam Brokers
Safe Forex Brokers Canada, in its research, discovered that there are many fraudulent brokers that target investors in Canada. These brokerages entice investors to deposit funds with them by promising returns in the markets.
A common practice of these scam brokers is that they tell investors that they have a strategy to get high returns from Forex, Cryptos or Robo Advisors. You must not fall for these scams.
The only way to be sure your funds are safe is to deal with nationally licensed brokers issued by IIROC. If you have an account with an IIROC-approved broker, you will be compensated by the Canadian Investor Protection Fund (CIPF) if your broker becomes insolvent.
The first factor to consider is whether the broker is licensed.
Before choosing a broker, go to the regulators website and do some verification. Don’t rely on online chatter or believe what someone else tells you; just run the check yourself.
To verify, visit www.iiroc.ca & Scroll down to ‘brokers we regulate’, type your broker’s name in the search box and click the ‘APPLY’ button.
If the broker is licensed by IIROC, their name will appear on your screen along with other information such as: office address, phone number and website address. Be sure to use the phone number and website address listed on the IIROC page if you need to contact the broker or visit their website.
The second factor to consider when choosing a broker is their customer service.
Try emailing them and see how quickly they respond or try their live chat service to see how responsive it is. You can also visit them at their office to see how they treat their customers.
The third factor to consider are the fees.
A scam broker could charge exorbitant fees and eat up all your deposits in trading fees themselves.
Some brokers charge an inactivity fee of up to CAD 150 for not using your account for a certain period of time. Others may charge fees for withdrawals and other services. There are various websites that compare the fees charged by brokers. You can visit them to compare fees and spreads.
The fourth factor to consider is risk management.
Make sure that the broker offers certain risk management tools such as stop loss orders, limit orders, guaranteed stop loss orders, negative balance protection, etc.
#2. Waste of money
Online trading is risky. There are no common statistics in the industry, but many experts say that most retail traders lose their money.
Trading is not easy and involves multiple risks.
One of the main risks is that the market may go against the direction of your trade and you may lose the amount invested in a trade. The situation could be worse if you use leverage to increase your profits, as this will lead to greater losses.
It is almost impossible to predict where the markets will go next.
Expert traders will tell you that risk management will save you losses. Let’s see what it is.
While trading, experts will tell you to manage your risks. Otherwise, you could lose all the money you have in your account, and more.
There are certain practices that traders use, such as stop loss orders and guaranteed stop loss orders that your broker must make available.
If you don’t manage your risk, you could lose all your capital, and if your broker hasn’t implemented “negative balance protection” (NBP), you could end up losing even the loan you took out ( for margin accounts).
This is very common in leveraged forex trading.
For those who borrow money from their broker to trade, NBP guarantees that you only lose your own money and not the money borrowed from you by the broker. However, NBP is implemented by your broker and not all brokers have it in place.
What do brokers offer for risk management?
- Stop-loss orders – It is an instruction that you give to your broker to close your open trading position and sell your assets (or buy assets) once the asset price crosses a certain point called stop price. This ensures that your losses are limited to the stop price you set.
- Guaranteed Stop Loss Orders (OSLG) – They are sort of an upgraded version of regular stop orders and they come with a guarantee that no matter how volatile the market is, your stop loss order must be executed at the stop price you specified and at no other prizes.
Stop loss orders are basic protection and will only get you out of a position and limit the losses on a trade. But this is by no means an indication that you could not lose your money.
The ease of access with which you can open a trading account has probably led so many young traders to trade online. But most of them lose their capital very quickly.
Trading is not an investment. The risk of losing money in online trading is very high, and the complex nature of some of the instruments available on trading apps that are not suitable for retail traders, makes it even more risky.
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