How does Online Trading work in Nigeria? | Dailytrust

How does Online Trading work in Nigeria?

Gone are the days when you had to call your stockbroker by phone to place an order. This was not only very expensive but was also time-consuming.

This old practice has been replaced and brokers now deploy online trading Apps that reduce human input and let you place trades on your own. This has cut cost drastically and put the power in the investor’s palms.  These Apps are accessible to even the people in the villages who may not be tech savvy hence they wonder how online trading and investing works.

To invest you need to settle for a stockbroker to link you to the stock exchange, download the brokers App, register and open a client account with the broker, then start investing or trading. There are over 328 listed Stocks on the Nigerian Stock Exchange (NGX) to choose from and there are also several SEC registered stockbrokers you can choose from. It takes days at max. (T+3) for stock to be delivered to your account after paying for the stock.

Currently, only retail equity investing and trading is regulated in Nigeria and retail forex trading is not yet regulated by SEC and so retail forex traders do so at their own risk.

Choosing a Brokerage

A stockbroker links you to the stock exchange as you can’t buy stock directly from the exchange. You need to choose a stockbroker who has a good trading App that has strong security features such as two factor authentication (2FA), charges low fees, etc.

To view a list of licensed stock brokers visit the NGX website on www.ngxgroup.com and view the ‘trading license holder directory’ or visit the SEC website at www.sec.gov.ng and view the ‘capital market operator search page’. You may also send an email to SEC via email address: sec@sec.gov.ng

Every Nigerian investor should download the Nigerian Stock Exchange (NGX) App known as “X-Mobile” from their phones online App store. The X-Mobile App gives you a market snapshot and an updated list of all available securities listed on the Nigerian stock exchange. The X-Mobile App is not a trading App but it gives you the required information you need and links you to all the stockbrokers in Nigeria when you click on the “trading” button in the menu.

The NGX publishes a performance report that rates Stock brokers by the value they bring and by the volume of their transactions in Nigeria and this report is available and updated regularly on the NGX website. This might help you when considering choosing a broker.

Safe Forex Brokers Nigeria has found in their research on Forex Trading in West Africa, that there are many fake forex brokerages & Ponzi schemes that are targeting investors & traders in Nigeria. Forex related scams are quite common in Nigeria. Although forex trading is unregulated in Nigeria, there are still over 200,000 forex traders in the country. All these traders trade via foreign regulated CFD brokers.

Since there is lack of regulation related to retail online forex trading but very popular among young investors, many scammers lure less informed investors to their Ponzi Scheme in the name of investing in forex & other markets.

As an investor you should also be wary of Ponzi schemes that take money from new investors to pay existing investors. When these Ponzi scheme operators discover that they can no longer recruit new members, and that people begin to suspect they are a fraud, they simply close shop and run away with people’s funds.

Investors should also be aware of investment pyramid schemes which operate like Ponzi schemes but where you are required to go and recruit new members to be below you in the pyramid so you can get some commission.

You can tell an investment is a Ponzi scheme when they are not registered with SEC, they promise high returns but don’t warn you about potential risks, they operate secret social media groups on WhatsApp, meta, etc., they tell you to alter the description of your Bank transfers/ payments to avoid regulatory audit, and they require you to recruit new members.

It is important to patronize only SEC licensed stockbrokers so as to qualify for compensation from the Investor Protection Fund (IPF) should your broker become bankrupt or choose to be fraudulent. SEC requires capital market operators to renew their license every two years.

Opening an Account

After picking a stockbroker of your choice, the next thing is to register and open your client account. Different account types such as personal account, joint account, corporate account etc. are available. You will be required to provide the following:

  • Government means of identification (National ID card, Driver’s license, International passport, permanent voters card, tax clearance certificate, etc.)
  • Proof of address (utility bill )
  • Bank Verification Number (BVN)
  • Upload of signature
  • Your Bank account number (to be linked to your investment account)

You should also be asked if you want to opt for direct cash settlement (DCS). When you agree to a DCS payment settlement method, sales proceeds go straight to your nominated Bank account instead of going into the stockbroker’s Bank account before he disburses it to you. SEC has made DCS mandatory for all stockbrokers to implement.

You can choose to open a cash account or a margin account. A cash brokerage account means you are not taking any loans from your broker to invest in securities and all your securities will be paid for 100% with your own cash. A margin brokerage account on the other hand, means you intend to take a loan to invest in securities.

Not all securities are tradable using margin or can be bought with margin loans. So, check with your broker for their list of marginable securities. Many Stock brokers such as Meristem securities, Morgan capital, etc. offer margin accounts to their clients.

Stockbrokers such as Meristem have a minimum account opening requirement of N10, 000 and some like CardinalStone Securities require N1 Million to open an account to invest in Equities and at least N50, 000 to invest in their mutual funds and structured investment plans (SIPs).

Before investing in stock it is advisable to analyze the books of the company to be sure their assets cover their liabilities plus the owners’ equity.

You don’t want to invest in a company that won’t grow and you record a loss. If this sounds like too much work, you could just buy shares of Exchange traded funds (ETFs). ETFs are a basket of securities and they contain stock of different companies and are managed by professionals. Buying ETF shares means you diversify and have a stake in all the companies in that basket.

Margin Lending

This means taking a loan from your stockbroker to buy securities. Usually, collateral is required in the form of shares or cash and these loans accrue interest which must be serviced regularly.

Margin is mostly used by online Equity traders who are looking to buy a stock, wait for the price to rise, and then sell to make a profit. Your broker will assess your financial position and give you a loan to value ratio (LVR) which will determine how much you are able to borrow.

An LVR of 1:2 means you can borrow two times your initial capital outlay. If your initial capital is N100, 000, an LVR of 1:2 means you can access a loan of N200, 000. However, you will be required to fund your account with an initial margin which is calculated in percentage as 1/leverage so in this case ½ or 50% of the loan amount.

In this example you will be required to fund your account with 50% of N200, 000 which is N100, 000. You can choose to pay the initial margin in cash or in acceptable shares. Some brokers such as Morgan capital accept only shares of blue-chip companies as initial margin.

Your initial margin must not go below a certain point called a maintenance level. If during the process of trading you keep recording losses, this brings down your initial margin and once it goes below your maintenance level point (which is usually fixed by your stockbroker), a margin call is placed across to you informing you to come and pay in additional money or securities to regularize your account and bring your initial margin back to a point above the maintenance level.

Failure to comply with a margin call means all the securities you bought on loan will be sold at the next available price irrespective of whether the available price is high or low, and your trading positions closed so the stockbroker can recover the loan he gave you. You will end up losing money if this happens.

To prevent a margin call, invest borrowed funds in assets of profitable companies whose prices will not drop and leave you exposed to losses, use risk management tools like stop orders, know your maintenance margin point and keep funds readily available in case of a margin call. It is always better to avoid using margin where possible.

 

Risk Management

While investing or trading, there is a risk of the market moving against you which can be managed using several orders some of which are:

  • Market order- This is an order by a client for the broker to sell or buy a specified amount of a security at the present market price or a specified price.
  • Stop order- An order to a broker to close a client’s position and trigger a market order at the next available price once a predefined “stop price” is crossed.
  • Limit order- This is similar to a stop order but here the market order is for a specified price and not the present market price.

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