The era of digitalization in which we find ourselves has given a new face to trading activities. Trade can now be done with anyone or organization, from any part of the world, with just your internet-connected device.
This means that with just the tip of your finger; and from the comfort of your home or office, you can transact business from any part of the globe. Physical meetings are not necessary, as was the case in traditional times.
When talking about e-retail, Nigeria cannot be left out among the countries that are currently registering a high rate of participants, both in Africa and globally.
Due to the popularity of online trading in Nigeria, people have been able to have wide access to several online investment platforms. This sparked their interest in financial markets globally.
The availability of online trading platforms has helped a lot in reducing the stress and time spent on trading. However, as popular as online trading is, it is essential to be aware that trading financial instruments online can be very risky.
It is unfortunate that many new traders suffer losses and totally fail in achieving the set goals. Indeed, they are easily swept away by the glamor of e-commerce advertisements and fail to research what it entails and the risks associated with it.
Statistics show that around 80% to 90% of online marketers lose their money.
So, before you step forward for the trade, you need to exercise caution. Take the time to carefully weigh your options, so you know what’s at stake.
Let us discuss some factors you need to consider before you start trading.
Retail is regulated by the SEC
Forex trading is very popular with retail traders in Nigeria. But the most important fact you need to know is that Forex trading and Contracts for Difference (CFDs) are unregulated in Nigeria.
However, the buying and selling of stocks and the trading of stocks are regulated and supervised by the Securities and Exchange Commission (SEC).
Cryptocurrency trading is completely out of the question as it has been banned by the Central Bank of Nigeria (CBN).
In October 2018, Nigeria’s SEC specifically warned against the adoption of online retail forex trading in an official statement. According to the SEC statement, “The public is hereby informed that online retail forex trading is currently unregulated and therefore subject to abuse. Until a regulatory framework regulation of online retail forex trading is developed by the SEC, any person participating in or engaged in such investment activity does so at their own risk.
The above statement clearly shows that forex trading is extremely risky in Nigeria. All Nigerian forex trading is open to sharp practices from dubious Forex brokers, taking advantage of the lack of regulation.
Forex trading is done at your own risk as there are no government regulations governing the operation of these forex brokers in Nigeria.
Even if you frequent brokers regulated by foreign regulators, recovering funds can take time if you are scammed by one of them.
You can lose more than your initial capital when using leverage
Leverage means borrowing money from your broker to trade.
You could trade stocks, currencies, commodities, etc. and the principle is largely the same. Leverage is expressed as an example ratio of 1:20, which means that with $1 you can trade assets worth $20
This loan gives you the advantage of buying more assets than you could afford with the money in your account.
Note that your broker may lure you with high amounts of leverage for their own benefit. This is because whether you make a profit or not, you are required to pay interest while repaying the loan.
Some forex brokers can even offer you leverage as high as 1:1000 taking advantage of the fact that there is no regulation by the SEC.
Suppose you want to buy 100,000 units of the GBP/EUR pair at a rate of 1.1924 per unit, the contract amount will be $119,240.
If your forex broker offers you 1:1000 leverage, you will only need to contribute $119.24 to open the trade. This means that $119.24 is your initial down payment.
If you are unlucky and the exchange rate falls to 1.1914, you lose $100, or 83% of your initial down payment.
What if the leverage was 1:10?
Your initial contribution or disbursement would have been $11,924 and this loss of $100 would have represented approximately 1% of your initial down payment. Take note of the percentage losses: 83% vs. 1%
Whether you are a Forex or stock market trader, you should note that as good as leverage looks, it can also cause you to lose a substantial amount of your trading capital. It can even cause you to lose more than your trading capital.
So, keep this fact in mind before engaging in margin trading.
Your broker can work against you
According to research by Safe Forex Brokers, there are over 50 offshore forex brokers that accept clients from Nigeria. Of these, only a few are regulated by Tier 1 regulators like FCA or ASIC. Most other brokers are not regulated by any top tier regulatory body and register clients under offshore regulations such as Tier 3 regulations in island countries.
These brokers have very low trust and no accountability. And these brokers can scam traders and run away with your money.
There have been instances where some brokers, who work in cahoots with larger traders, engage in what is known as stop loss hunting. This is a strategy usually adopted by large traders, to force some smaller players out of their positions.
The biggest traders, colluding with some bad brokers, could manipulate the price of an asset at a stage when your stop loss order is activated.
After a barrage of stop loss orders may have been triggered, this leads to high time volatility that professional traders take advantage of.
During high volatility, a price gap may occur
Price gap can be defined as a situation where the price of an asset in online trading is different from the previous one without trading activity taking place in between.
The price gap usually breaks out during high market volatility. This also happens during non-working days like holidays and weekends. After trading resumes, the asset price may have exceeded the stop price you set. The new asset price may be lower than you expected.
When this happens, you are forced to buy or sell at a different price than you expected. This could have a big impact on your profit and loss, as you would not be able to execute the stop loss order at the correct price.
Fees can affect your earnings
Someone who wants to be an active trader should note that this involves frequent opening and closing of positions and attracts a lot of fees for both Forex and stock trading. So a new trader who doesn’t understand this can see their profits eroded by a myriad of levies.
In Nigeria, capital gains tax is not levied on the sale of shares and government debts such as bonds. This is to encourage participation in the capital market.
However, in Forex trading, foreign brokers may charge you up to $15 as inactivity fee, but with the current exchange rate of N415.57 per dollar, this amount is quite tangible. There are also other fees such as commissions, overnight swap fees, etc.
Spread must also be taken into account. It is the difference between the buying and selling price of an asset. Most commission-free forex brokers make money from this.
When buying a currency pair, you buy at the Ask price which is always higher. When you want to sell that same currency, you sell at the Bid price which is always lower. This price difference is appreciated by the broker.
You can get addicted
Online trading comes with announcements of financial freedom and high profits, but there is a high probability that you will lose all your money, and even borrow from friends.
Just like gambling, a trading addiction could cause you to lose your personal savings, possessions, and even your marriage.
In fact, some Nigerian banks have banned their staff from forex trading after it was discovered that some of them were using their clients’ funds to trade forex.
Don’t put money you can’t afford to lose
Online trading is always painted rosy and you are never told about the risks you might be exposed to. Whether you are trading currencies or stocks, one thing is certain: you will incur a loss at some point.
Limit any losses you may incur by using stop loss orders to set a stop price so that once the asset breaks above that price, your position is immediately closed.
Only invest funds you don’t urgently need and you won’t lose sleep if you lose. Online trading involves high risks and it is better to also explore the possibility of investing your funds in the capital market.