Should I Trade Stocks or Forex in Nigeria?

Stock trading involves buying shares of a company listed on the Nigerian Stock Exchange (NGX) and selling them back when the value appreciates. Currently, NGX has approximately 241 publicly traded stocks, so traders have plenty of options to choose from.

Forex trading, on the other hand, involves using one currency to buy another for purposes such as speculation and hedging currency risk. Forex trading is done over-the-counter because there is no physical exchange venue. We will compare stock and currency trading in Nigeria using three benchmarks: regulation, liquidity and risk.

For stock trading, the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NGX) regulate the activities of all stockbrokers in Nigeria and have the power to sanction them. To start trading stocks, a trader must register with an SEC-licensed stockbroker and download their trading application.

The SEC has also established a National Investor Protection Fund (NIPF) to compensate investors who suffer pecuniary loss when a capital market operator fails to meet its contractual obligations due to bankruptcy, fraudulent acts of the capital market operator or its personnel.

To trade forex by individuals, there are no regulations in place yet. The SEC has said that anyone who engages in retail online forex trading does so at their own risk. In Nigeria, only banks exchange currencies with each other in the interbank market.

Nigerian regulators are of the view that retail traders should refrain from trading foreign exchange. Individuals who have chosen to go ahead and trade forex online at their own risk do so by registering with leading foreign licensed international forex brokers dealing in Nigeria. However, if traders are duped, the SEC cannot intervene because international brokers are not under their authority.

Nigerian forex traders are not eligible to benefit from the NIPF compensation fund if they lose money to a fraudulent international forex broker.

#2. Direct Cash Settlement (DCS):

All stockbrokers in Nigeria are required to implement DCS. To improve transparency, increase speed and end insider abuse and embezzlement of client funds, the SEC in Nigeria has now made DCS mandatory unless a trader opts out.

Prior to the advent of DCS, when a stockbroker sells a trader’s stock, the proceeds are paid into the broker’s account from where the broker transfers it to the client’s account.

However, with DCS, proceeds from sales go directly to the trader’s account without going through the broker’s account. This ensures transparency and is a good regulatory measure. The DCS only applies to SEC-regulated securities brokers in Nigeria. International forex brokers are not mandated to implement DCS as they are not regulated by the SEC.

Every stock is listed on the Nigerian Stock Exchange, so their prices are determined by the forces of supply and demand. When a company is doing well and showing good earnings, the demand for its shares will be high and the price will also appreciate.

These shares will be more liquid than those of a company that is not doing as well. But in general terms, there is liquidity in the stock market.

In the foreign exchange market, liquidity is very high, in fact it is the most liquid of all the financial markets in the world. The 2019 BIS report estimated daily turnover in the global forex market at $6.6 trillion.

Once you are trading a major currency like EUR/USD, there will always be a ready counterpart. It is easier to sell currencies in the forex market than to sell stocks in the stock market.

In the stock market, you face four types of risk that could cause you to incur a loss every time you trade:

  • Market risk– The possibility that you are wrong in your price speculation. You can buy a stock expecting the price to go up, but the price goes down instead and you face a loss.
  • Industry risk– The possibility that changes in an industry will affect a company’s performance. If a new technology comes out and a company can’t adapt quickly, its competitors could outpace it.
  • Regulatory risk– The possibility of regulators in a particular sector tightening regulations thus forcing companies that cannot meet the new requirements to quit or relocate to other countries. The Dunlop and Michelin Tire companies in Nigeria were affected by this risk and had to leave the country.
  • Business risk– The probability that a company will make a loss, which will lower its share price and prevent it from paying dividends to shareholders.

When trading forex in Nigeria, you encounter the following risk:

  • Counterparty risk– These are the chances that your forex broker is not licensed or even if licensed, they could embezzle your funds. This is a major risk for Nigerian forex traders as they have to patronize international brokers as the SEC has not licensed any local forex brokers and does not even support forex trading. Fraudulent forex brokers target markets like Nigeria due to lack of government regulation.
  • Leverage risk– Leverage is when you take out a loan from your broker to trade. When trading forex, you should use leverage-based products, such as the contract for difference, to benefit from fluctuating prices without buying the currency. Using too much leverage puts you at risk of losing all your capital and even owing your broker money. In countries where forex trading is regulated, governments limit the amount of leverage brokers can offer traders. However, since retail forex trading is unregulated in Nigeria, some brokers lure traders with excessive leverage and they end up losing all their capital.
  • Risk of change– The exchange rate of a currency can fall very quickly on the foreign exchange market. Reporting, politics, conflict, monetary policy, etc. could cause a currency to lose value. Sometimes, even when risk management mechanisms such as stop loss orders are deployed, exchange rates may still exceed the set stop price. This will cause you to fill your market order at a lower price than you expected and you will incur a loss. The forex market is notorious for this type of volatility.
  • Risk of failure– Statistics show that more than 85% of forex traders lose money. This is partly due to factors such as market volatility, gamification of forex trading, inadequate trading knowledge, FOMO trading, etc.

Reference

stock trading

Retail Forex Trading

Regulation

Regulated

Not regulated

Risk

Average

High

Liquidity

Average

High

In the table above, we have compared stock and currency trading in Nigeria using the three criteria of regulation, risk and liquidity.

First, stock trading is properly regulated and has an investor compensation fund, so regulation is excellent. Retail forex trading is unregulated in Nigeria, so regulation is poor.

Second, stock trading involves some manageable risk, so the risk is medium. Forex trading has a high failure rate of over 85%, high volatility, and the lack of local regulation makes it very risky, so the risk is high.

Third, trading stocks on the stock exchange provides some liquidity, but there are about 241 listed stocks to choose from, so liquidity is average. Forex trading is highly liquid with daily turnover of $6.6 trillion, so liquidity is considered high.

Online trading is a risky business because no one, not even the smartest robots, can predict market movements. With this in mind, traders should not take additional and avoidable risks. Forex trading is unregulated in Nigeria and has a high loss rate as most traders lose money. If you must trade in Nigeria, it is safer to trade on the stock market where at least there is government oversight and manageable risk.

Comments are closed.