The advent of the internet has made many activities easier and hassle-free. One such activity that has grown a lot because of the internet is retail trading. There are estimated to be over 200,000 online traders in South Africa.
Prior to the coming of the computer and internet age, investors had to see the broker physically or place orders via phone. Also, there were huge barriers to entry for retail traders, including high transaction costs.
However, the internet has helped to bring high-speed trading at very low costs to even retail traders.
With new and modern technology, traders can now trade from any part of the world with the usage of an internet-connected laptop or android phone with just a few clicks.
But this also comes with a lot of risks.
It is notable that online trading in South Africa & around the world by retail investors has experienced an explosion during the Covid-19 market crash & subsequent bull rally. And a lot of these traders may not be well prepared for the downturn in the markets.
What is an Online Trading?
Online trading has to do with trading in several financial instruments globe with the usage of computer and electronic devices.
It involves buying and selling financial instruments via an online trading platform. These platforms are created by brokers for retail traders.
How can I Start Online Trading?
Any new trader who wants to trade online will first have to open an account with an online broker. After taking this step, your broker will then provide you with trading software or app that you will use to place orders.
The broker will also help you open a trading account. However, if you are not ready to trade with a live account, you can practice, using a demo account. This system will give you a free trial account funded with virtual money.
As a trader, after using an online trading platform to find the markets or instruments you want to trade, you can execute the orders through the broker’s platform.
The broker will also search for a counterparty, (another trader who is prepared to take the opposite side of your trade at your desired price) after the completion of the search, the deal is made via the broker between you and the counterparty.
All this is fully automated, and you can buy or sell easily if there is enough liquidity.
How does the Trading Platform work?
The trading platforms offered by the brokers have different features like stop loss for reducing risks, and access to data & charting.
So, if you are a trader, it is essential for traders to do extensive research so as to identify the safe and trusted online broker or trading app before trading with your money.
There are multiple online trading platforms in South Africa which offer diverse trading instruments. Therefore, you need to compare and choose the one that is best suited for your trading needs.
Due to the large number of online brokers in South Africa, it may be difficult to compare their pricings but it is highly advisable to do this. You can do this by writing down fees of each broker from comparison websites or you can simply do it by going directly to the broker’s website.
Every online trader should note that credit worthiness of their brokers goes a long way in determining the safety of their investments & deposited funds.
Which Instruments can be traded online?
Equities
Online share trading can be done on the stock listed on the Johannesburg Stock Exchange, JSE.
A trader needs an online stock broker that is licensed by JSE to trade stocks. Traders can trade derivatives on equities listed on the market. There are about 60 brokers listed on JSE for Equity Derivatives.
If you want to invest then you can invest in stocks through the following platforms like Easyequities, or platforms offered by major banks.
Forex
The foreign exchange market is an over-the-counter (OTC) global network of buyers and sellers namely major banks, central banks, multinational corporations, retail & institutional investors; who trade currencies.
Online Forex Trading in South Africa can be done through forex brokers in South Africa that are regulated by FSCA. Or you can also trade via brokers listed on JSE that offer Currency Derivatives.
A currency exchange rate is the rate at which the base currency can be exchanged for other currency or quote currency.
Investors trade those currencies in pairs, such as the widely traded EUR/USD currency pair. Factors such as inflation, political activities and industrial production have influence on these exchange rates. Forex market is the biggest financial market by volume.
Indices Trading
This is a derivative product where traders attempt to make a profit from the price movements of indices. This Instrument can represent a particular market or a whole market.
An example of an index is the JSE FTSE All-Share Index.
It is not actually possible to directly buy or sell an index as it is possible in stocks. Indices investors make use of Exchange Traded Funds (ETFs) to invest in or of derivatives like CFDs to speculate on the movements of various indices.
Commodity Trading
Commodities like silver, gold, aluminum and so on are also traded in South Africa via JSE listed commodities brokers or as a CFD via forex brokers.
The Instruments are usually traded heavily in the derivatives market like South African Futures Exchange, SAFEX (which is a subsidiary of the JSE) so as to reduce principal loss risk.
Online Trading Regulations in South Africa
Investors should note that the Capital markets in South Africa are regulated by FSCA.
FSCA play vital and critical roles in online trading by authorizing FSPs, and creating a framework for online trading.
These rules & oversight ensure that the funds of traders and investors in SA are safe.
For example, the example JSE, which is a licensed exchange, oversees the compliance & abuse monitoring of their authorized members. Stock Brokers must obtain a license from JSE before offering stocks and derivative services to traders.
FSCA also regulates forex brokers & CFD platforms. It should be noted that Forex and CFD traders should always choose brokers that are regulated by FSCA.
Are there any Risks of Online Trading?
Online trading possesses high risks whereby the trader can lose the invested amount.
The risks are numerous and cannot be stopped completely. However, taking note of some factors can help reduce the risks to a certain level.
Capital Markets Risk is the most common risk among various trading instruments. This is because the price movement is very volatile and unpredictable. This risk can be reduced to some level by doing extensive analysis of market trends and use of risk management tools like stop orders and limit orders.
Also, in online trading, there is a risk related to third parties like your broker. This can be reduced by only dealing with licensed brokers.
Can I earn with Online trading?
Yes, it is possible to earn with online trading.
But you can also lose substantial funds in trading; depending on the level of knowledge you gather and how you understand the markets, including risk factors and regulatory issues.
So before taking a step towards online trading, spend some serious time educating yourself on the type of instrument you want to engage yourself in. Take pains to familiarize yourself with every type of trading that goes on in the online markets,.
As you begin to research, draw your strategies and the trading Instruments that work best with those strategies.
