How can you trade online in Nigeria? Basics you need to know - THE GUARDIAN
With the prevalence of the internet and smartphones, all necessary information is available at the fingertips of every person around the world. Internet-connected devices have enabled accessibility by empowering individuals to communicate, access information, gain knowledge and do many productivity tasks from anywhere.
One of the major sectors that have been impacted the most is the global financial markets. Through advanced technologies and state of the art software like electronic trading systems and mobile-based apps the financial markets have been made accessible to retail investors.
With internet access, individuals can now access any financial instrument and invest in them. Investors can now invest in many types of financial instruments and asset classes from all the major financial markets and centres across the globe with a click of a button. In Nigeria too, one can trade online on many instruments including Stocks, Derivatives, Commodities and Forex.
As an investor your main goal is to understand what is the best way to make profit in the market. So, to arrive at an informed decision you need to understand what are all the instruments available and which is the best one for you. It’s only on the basis of an instrument that investors can choose their brokers and begin trading.
Types of Instruments you can trade online in Nigeria
There are 7 main types of instruments that are available for online trading in Nigeria:
Stock Trading One of the old instruments to be traded on the market are stocks. Stocks are small portions that investors can buy of a company and they become its part owner. Based on the performance, if an investor thinks a company will do well then, he will buy the stock of a company at a certain price. Depending on how well the company does, the investor can sell to make profit or keep the stock for growth in future.
SEC is the governing authority for the capital markets in Nigeria. NGX is the authorized stock market. SEC is responsible for regulating all the exchanges (including NGX stock exchange), securities and market intermediaries in Nigeria, while NGX licenses, monitors brokers and companies on its exchange so they are compliant with their & SEC rules. Any company who seeks to be on the NGX should get prior approval and license to be listed on the exchange.
NGX allows retail investors to trade stocks of companies in Nigeria through their authorized brokers. The total market cap of NGX equity market is around N20.16 trillion Naira. NGX categorizes stocks in Premium Board, Main Board, Growth Board.
The NGX website has all the information an investor needs so that they can understand who all are listed on the platform and any other information needed to trade on the exchange.
Commodity Trading The whole world consumes and relies on commodities as a raw material or for direct consumption. These include agriculture goods like wheat, maize, corn, metals like gold, crude oil etc. the idea behind commodity trading is to ensure that the market is well balanced by connecting buyers & sellers and allows for price setting.
There are times you might feel that a commodity is prices extremely high it’s because demand is greater than supply. Based on how a country’s food or commodity production and consumption is the prices are decided. And investors can trade on the commodities market/exchange speculating as to what the price of a commodity in the future might be.
Nigeria has 3 main commodity exchanges which are authorized by SEC i.e.: LCFE, AFEX, NigeriaComex where you can trade the commodities.
ETFs Trading The idea behind ETF is that the fund managers use the money of various investors of ETF to collectively buy large instruments or securities such as stocks, bonds, commodities etc. These could be either in single types of securities like shares of companies in same sector or basket of diversified securities like bonds and shares of top companies in all sectors. The decision as to which instrument a fund manager will buy is dependent on parameters set by manager and market conditions. This is generally mentioned on the ETF description on the exchange. It is similar to indices as it tracks performance of the underlying securities.
The distinguishing factor of ETFs from Mutual Funds is that ETFs can be traded all day on the market whereas Mutual Funds can be traded only once in a day after the market closes.
ETFs is similar to stocks except that ETFs don’t consist only stocks but they contain different instruments under one name so that they can be traded in bulk and can be bought/sold just like stocks on NGX.
For more information regarding ETF in Nigeria visit the NGX website and collect more information before you can invest.
Bonds Bonds are investment schemes where investors loan their money to a company or government. This loan given by the investor is called a Bond. Bonds are fixed income securities in which issuer of bond promises to pay fixed income payment or coupon payments based on a % return rate or yield. These payments can be annual or semi-annual or paid in full at expiry. A bond contains the loan details like tenure, what is the interest and repayment structure, yield. Bonds are generally issued to finance short term projects as companies might have urgent needs to be fulfilled.
NGX has listed eight different categories of bonds that investor can invest into; which include Federal Government and State Government Bonds, Corporate Bond, Green Bonds investing in Green Energy.
Bonds are looked at as fixed payments that can earn interest over a period of time. Since bonds are issues by large companies and governments, there is a guarantee that you will get your interest payments on time. Government Bonds are safest to invest in.
Before you choose to invest into bonds, have a look at all the different category of bonds and which companies you are interested in investing in.
Indices Indices are instruments through which investors can track the performance of shares of sector or group of top companies in the market without having to go through a lot of information. These act as a benchmark for investors, Mutual fund & ETF managers.
Through indices you can predict the future price of a stock or instrument based on the past performance of the sector and current factors that affect the price. Indices allow investor to view the entire performance of a market or industry through a heavily automated process.
As an investor you can predict the price of indices whether they will go up or down based on the market conditions affecting the underlying companies/sectors without taking ownership of the instruments. There are so many indices that are traded on the market everyday solely because of the high liquidity it has.
NGX has various indices that benchmark top sectors, companies with All share index, NSE 30, Banking etc.
Derivatives Trading A derivative is a contract that is between two or more parties. The object/underlying asset of the contract can be any instrument of choice varying from equities, currencies or commodities.
There are different types of derivatives. Futures contracts, forward contracts, options, swaps, and warrants are commonly used derivatives. Following new SEC rules on derivatives in Dec, 2019. SEC has authorized NGX to launch derivatives in Nigeria. NGX plans to launch derivatives trading soon.
Unlike other instruments derivatives carry huge risk as the price of the asset can drastically affect the derivatives thereby creating huge losses or profits. If you are new to the market then don’t look to invest in derivatives until you are sure of how it operates.
CFD & Forex Trading CFD is a cash settled contract that allow traders to speculate on the price of a commodity or security on the market. If the price falls, then the investor must pay the seller the difference between the price he/she bought the instrument at and the current market price at which it is sold.
If the price at which the instrument is sold is higher than the price it was bought by trader then the seller will have to pay the trader the difference, hence trader makes a profit.
With CFDs one can trade in Commodities, Forex, Indices etc. CFDs allow traders to trade large volume using small money via leverage.
According to Trade Forex Nigeria, “CFDs are one of the most commonly traded instruments online as it allows traders to make large profits with little money using leverage. But CFDs also carry a lot of risk which might bankrupt any investor in no time, this is the reason why CFD’s are highly regulated in countries like UK, Germany, Australia, South Africa that restrict leverage, onboarding requirements on these instruments; while it is banned in many other countries due to its risk factor. It is important to note that CFDs are not yet regulated in Nigeria”.
Online Forex trading falls under the scope of CFDs. Forex trading is highly regulated and biggest financial market around the world, but it is highly risky due to the leverage offered by brokers & market volatility.
There are CFDs for almost every instrument on the market, you need to choose an instrument that you are familiar with. Before you invest in CFDs it’s best if you understand the risks associated with it and only invest after having understood all the risks.
Where can you trade online in Nigeria?
Trading Apps & Online Brokers authorized by NGX In Nigeria stock brokers must be licensed by SEC & NGX to offer intermediary services on capital market and they must follow rules, practices set by SEC for investor safety and capital market transparency, stability; no unregistered brokerage/person can offer such services without authorization as it is illegal.
You can trade shares, indices, bonds, ETFs through NGX authorized brokerages. Many brokerages like GTI SECURITIES LIMITED, ABSA, STANBIC IBTC offer online trading through their website and app.
In Nigeria, there are only 186 brokers that are licensed by the NGX. It is highly advised that you trade only with the brokers who are regulated by the NGX. There are a lot of scams in the financial markets and trading with regulated brokers will save you from being a victim to those scams.
Brokers authorised by Licensed Commodity Exchanges Traders can trade commodities like Agriculture Produce: Cashew Nuts, Soybeans, Cocoa, Casava Roots, Maize etc; Metals including Gold on SEC licensed commodity exchanges like LCFE, AFEX and NigeriaComex.
You can trade online through their brokers/dealing members. Each of these exchanges list their authorized dealing members.
Many of the brokers like Cowry Asset, GTI securities, Stanbic IBTC Stockbrokers offer online commodity trading.
CFD & Forex brokers in Nigeria You can trade global markets like major indices, Commodities, Forex through CFD brokers.
Currently there is no regulating authority for CFDs in Nigeria. So, the best option available to traders is to trade with internationally recognised CFD & forex brokers in Nigeria that are regulated by the top regulators in the world like FCA, CySEC or to avoid trading CFDs altogether.
Top-tier regulated brokers have stricter leverage restrictions and funds security standards than other CFD brokers. Despite regulations, CFDs are still very risky and must be avoided by beginners as they are suited for advanced investors.
Beware of the Risks, Drawbacks & Caution in Online Trading As exciting as it may sound, but online trading has many drawbacks & risks and profits are not guaranteed. Some of the risks include:
- Uncertainty of Profits
- Risk of Volatility
- Inability to close order due to lack of Liquidity
- Risk to Capital and where losses may exceed invested Capital in cases of CFDs and other complex instruments
- Leverage Risk
- Security Concerns of Hacking online and scams
- Technical Difficulties while closing trades
- Too much chatter and not having accurate information
Traders must apply caution by:
- Always choosing a regulated broker to minimize their risk.
- Learn before you start trading and Never Invest in what you don’t understand and never invest what you can’t afford to lose.
- Always start with Demo Trading