The coronavirus pandemic that hit in March 2020 caused many young Africans to take to online trading as a means of earning a side or full-time income. Online trading has also been getting regular media attention as young traders have started seeing success in this nascent field.
The Pros & Cons of Online Trading
Online Trading is growing popular, but what are its Pros & Cons?
Online trading refers to trading in various types of financial securities such as CFDs, equities, futures, options, and so on. Earlier, such trading was restricted to sophisticated institutional investors but is now available to the masses due to the advent of the internet and low cost online brokerages that allow investors to invest in global assets with almost zero commission model.
Online Broker comparison portal, Forex Brokers SA published a report that online trading volume in Africa grew by almost 120% in 2020 with South Africa, Nigeria and Kenya having the most demand and retail traders. Number of retail traders in Africa grew from 1.3 Million in 2019 to almost 2.1 Million in 2021 attributed to demand for speculation and growth investing in global financial instruments & assets like Stocks, Commodities, Cryptos, Indices, forex, derivatives among new investors looking to profit from volatility, price fall in the markets amid the Coronavirus Pandemic.
Local African stock exchanges like JSE (Johannesburg Stock Exchange), NSE (Nairobi Securities Exchange), NGX (Nigerian Exchange Group) have also reported their highest ever trading volumes in 2020 and 2021 as this demand is still rising and most exchanges & stocks are still experiencing bull run. NGX reported 62.42% growth in market cap from N12.97 trillion in 2019 to N21.06 trillion in 2020, while NSE reported 43% growth in past 3 months.
Many leading tech stocks like Tesla, Shopify have increased in market cap due to rising retail demand from smaller investors. Low cost Online Trading Apps like EasyEquities, Faida, FXPesa, Scope Markets, Pepperstone, Cowrywise, Invest Bamboo, Chaka have made it easier for African retail investors to invest/speculate in assets/instruments like stock, mutual funds, ETFs, Indices, Forex etc.
In this article, we’ll discuss the pros and cons of online trading for Kenyan residents.
Pros of Online Trading
- Access to Financial Markets - As mentioned earlier, retail traders did not have access to such financial markets. Trading in these markets was considered to be too risky for individuals, and hence, the markets were restricted to only institutional investors & banks.
However, now the financial markets have been made open to the public. Global online trading brokers have broken into mainstream popularity by offering their services to beginner and novice individual traders.
Having access to these financial markets means that anyone can now invest in global securities through such brokerages. For example, a person from Kenya can now buy stock CFDs of American companies like Apple and Microsoft.
This opens a whole new world of opportunity for those who are interested in making money by trading in the financial markets.
- Lower Commission Costs - As the popularity of retail trading grows, many online brokers are also reducing their fees. This reduction is largely due to economies of scale. Since online brokers are now catering to huge numbers of traders and are handling high volumes on a daily basis, they can afford to lower the costs per trade.
For example, popular online brokers like FXPesa and Luno have significantly reduced their commissions after reviewing their fee structures. This comes as a boon for the new online trader who can now trade at lower costs.
Furthermore, online brokerages offer their trading services at steep discounts when compared to traditional brick-and-mortar brokerages, making online trading even more attractive.
- Monitoring Trades - It used to be hard for traders to keep a log of their performance and track all their trades. This used to be done by hand or on spreadsheets. However, the availability of sophisticated trading software and tools has made this process much easier. Now, online traders can easily record all their trades since it is done automatically by the trading software.
These tools also allow you to monitor the performance of your active trades. You can immediately find out the value and profit/loss on your open trades. This means that if a trade is not doing well, you can immediately cut your losses.
- Availability of Trading Tools - It has become significantly easier to become an online trader these days thanks to sophisticated trading tools and software.
Some of the most popular trading platforms include MetaTrader 4 and cTrader.
These trading platforms allow traders to remain highly informed about their trades and market conditions. Some of the most widely used features of such platforms are news, technical indicators, and charts.
Through these features, a trader can find out what he needs to know at a much faster rate than was possible earlier. A trader can use the power of sophisticated computing to make informed trades.
These tools also offer much-needed features such as stop-loss orders which allow traders to mitigate their risk and exit from loss-making trades.
Cons of Online Trading
- Unregulated Brokers - The internet has made it possible for many unregulated brokers to start offering their trading and investing services. These online brokers are not regulated by reputable financial authorities like the FCA or the ASIC. Instead, these brokers opt for offshore regulation which may not be strict or effective in holding the online broker accountable.
For Kenyan traders, it is important to check if an online forex broker is regulated by the CMA or if a stockbroker is regulated by the NSE. The CMA and the NSE are the financial regulators of Kenya and have the power to hold registered brokers accountable. In case of any issues, traders can take legal recourse against erring brokers, but this is only possible if an online broker is licensed by the CMA or the NSE to offer its trading services in Kenya.
- Gambling Tendencies - It is quite easy for a new individual trader to start speculating on the financial markets in the hopes of getting rich quickly. Online traders advertise their services as a means for traders to make a lot of money without spending too much effort.
This is a fallacy, since trading on the financial markets is a highly sophisticated activity that requires years of study and practice.
Trading can lead to large losses or the loss of the trader’s total capital unless a trader is very careful. A trader needs to study and implement proper risk management techniques in order to ensure that bad trades do not become worse.
The tendency to gamble on the financial markets is not new. Many traders believe that trading is a matter of luck and it is just a matter of time before they get rich. However, nothing can be further from the truth.
- Risk of Phishing & Cybersecurity: The internet can be a dangerous place. There are many scammers out there who are looking to steal your identity and personal information. Phishing is a type of scam in which a scammer pretends to be someone else in order to obtain sensitive information from a victim.
Phishing scammers commonly pose as online brokers in order to get sensitive information from inexperienced traders. These scammers set up websites which look very real and entice visitors to give up their information.
Hence, traders need to be very careful when submitting sensitive information online. They must verify the genuineness of websites before providing any information.
- Overtrading: Overtrading refers to the tendency of traders to recuperate their losses by investing more money. This tendency creates a trap for a trader by making a bad situation even worse. A trader may believe that he can turn a loss-making trade into profit, however, this rarely happens.
The best thing to do when faced with a bad trade is to cut your losses and exit the trade rather than making the problem worse. The tendency to invest more and more in the hopes of recuperating losses is also known as “gambler’s fallacy” and online traders need to be aware of it.
Online trading is only going to increase in popularity as awareness about it grows across Kenya and the rest of the world. Thanks to the low barrier to entry, online trading is a space of high opportunity for Kenyan brokers & traders.
With the access to global financial instruments, Kenyan traders can get exposure to market conditions in other parts of the world. But traders must watch out for the risks at the same time.
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