Key Things to Know while Trading and Investing Online

Online Trading in Nigeria continues to record an upward trajectory amongst young people who are majorly under 35 years of age.

Thanks to this era of digitization & increasing mobile data penetration, where you can sit in the comfort of your room and equip yourself with information and knowledge, and start trading with just a click of your finger.

Many young Nigerians are now turning to their internet-enabled smartphones to take active roles in the global financial markets. A sizeable number of the youth are incessantly trading financial instruments online such as stocks, forex, cryptocurrencies and commodities.

Statistics show that there are now over 1.8 million online retail traders in Africa and trading volumes continue to increase with South Africa, Nigeria, and Kenya taking the lead.

Online trading in Nigeria has led to a phenomenal increase in local trading technology and online platforms.

As a result of growth in online trading, lots of new trading and investing Apps have launched in Nigeria which offer you the opportunity to invest in the markets.

However, despite the impressive improvements in online trading, there have been deep concerns about various risks and frauds associated with investing and trading which new beginners need to understand and watch out for.

New traders and Investors need to be equipped with some information about the capital market before putting their hard-earned money into it so that they would not lose their money ignorantly or become victims of scams.

There are some things you should embrace and there are some things to avoid.

#1 Educate Yourself

The need to get yourself some degree of education about a particular trading Instrument is the most important step before you decide to start committing your money to Investment.

First and foremost, you need to have a proper understanding of what you want to do and how you are going to do it. You can talk to people who have had considerable online trading experience and from their perspective, you can pick some things from their wealth of experience.

You should read articles relating to online Investment and listen to relevant business news to get yourself updated on the trading Instrument that is of interest to you.

Also, learn about the differences between investing & trading, and make your informed decision whether you want to trade or be an investor.

Learn as much as you can about the risks of each investment, get into the fundamental details, learn about the markets, accounting & other stuff that will have to pick the right investment.

#2 Only trade with money you can afford to lose

One important factor that Nigerian traders should know is that it is very wise and advisable to trade only with funds they can mentally afford to lose.

Adhering to this trading principle is one of the principles of money management. Many online traders and investors who have invested above their purse limit ended up blaming themselves.

You should note that risking more than your threshold per trade is an act of greediness which may make a trader quickly lose all his money and make him become bankrupt and frustrated.

If you want to survive in the growing online trading market in Nigeria, you need to determine the amount per trade that you are willing to lose & you also need to determine your initial trading capital that you are willing to risk.

For instance, if you determine that your risk per trade is N10, 000, and if you lose that money, then don’t put more money again until you understand the reasons for your losses, and how you can correct it.

A trader should know that it is not wise to trade if can cannot get at least 1:2 risk to reward per trade.

You should ask yourself how you will feel if you invest with all your money and it results to zero, will you be okay? Just imagine how you will feel if all the money you have budgeted for basic needs like house rent, children’s school fees and so on disappears in a trade.

#3 Know the Risks of the Instruments You Are Trading

As you start to commit your money to online trading or investing, you should have it in mind that risks are inherent in online Investment. Even the experienced traders lose money.

There have been lots of situations where brilliant analysis of the markets did not produce the desired results as planned.

For instance, the Covid-19 pandemic caused massive volatility in the financial markets such as stock, commodity and currency markets. It was reported that lots of investors and traders lost hefty amounts of money due to this, some even recorded alarming loss of millions of Naira in one day.

In order to minimize your loss, every trader and investor should understand the risks of the instruments and markets they are investing in before committing their funds. It is also advisable to use risk management strategies like stop loss orders.

It will also be very wise of you to test your investment strategy while demo trading before using your real money to trade. You should know about risk to reward ratio (RR ratio).

A good RR ratio stands at 1:2 or more and when RR ratio is 1:2, a trader risks his money for at least 2 times return.

Long term investment in the markets instead of trading and diversification of your portfolio can also go a long way in reducing your risk.

#4 Avoid Margin Trading

Generally, a trader or investor uses the money available to him to make investments. This is called spot trading. However, there are some cases where the investor or trader borrows money from his brokerage firm to engage in an investment; this is called margin trading or buying on margin.

Have it in your mind that the returns on margin trading could be good, but the risks are extremely high. Remember, Margin is the money you borrow.

Margin trading is an extremely risky strategy, especially for a new trader. You should know that unregulated margin trades were one of the main causes of the stock market crash of 1929 in the United States. Also, CFD traders using leverage in Australia lost millions during March 2020, during the Covid-19 market crash as per ASIC, which prompted them to put restrictions on leverage that CFD brokers can offer to retail traders.

Research by Safe Forex Brokers Nigeria has found that many CFD & forex brokers that accept clients from Nigeria require margin of only 0.1% for forex trading, and this requirement is even lower at some brokers. This means that these brokers are offering 1:1000 or higher leverage which is very risky for retail traders. Many retail traders in Nigeria use very high leverage in order to magnify their profits, but this only results in loss of initial capital.

One major risk in margin trading is that you don’t know with any certainty if the instrument you use the loan for will yield the desired profit. Even the most experienced and intelligent traders in some cases make a poor analysis of the market, which means that the risks associated with margin trading are indeed massive.

For instance, if the value of a trader’s Investment declines, he may be required to deposit additional capital to cover his margin. In fact, there is a possibility that you lose more money than your initial investment when you buy on margin.

Also note that if your account equity isn’t high enough to maintain your position, your broker may resort to liquidating your trading positions if you are not complying with the loan agreements.

#5 Don’t Give Room for Gamification in trading

One important fact you need to understand as a trader or investor is that brokers are naturally selfish. They will always encourage you to trade more because doing so will be to their own advantage as regards with making money.

A broker will make more money from commission when you trade more on its platform. So, there is an incentive for the broker to encourage you to trade more, so they can make more money in trading fees from you.

There are some situations where many retail traders are tempted to make some particular trades that are not the best for their portfolio and trading plans.

If you want to be a successful trader, it is vital to draw out your own plans and strictly adhere to them. Sticking to your goals will help you ignore unnecessary temptations that can jeopardize your position.

#6 Beware of Scammers

Many inexperienced traders in Nigeria have had a raw deal from the hands investment schemes aimed at deceiving individuals into giving their money to fraudsters. The scammers often do this by luring unsuspected traders in the name of Instruments like Forex, cryptocurrency, stocks and so on.

One essential feature that will make you detect them easily is that they promise huge, impossible, or unrealistic profits like 100%-500% per month or per day.

All those systems are just Ponzi or Pyramid schemes.

Note that they may pay the initial depositors so as to lure more people to come in. Along the way, the investment will collapse and you will not be able to trace the promoters.

Culled From The Nation