New traders need to keep a few points in mind before putting any money into trading. Take a look at these pointers.
The internet has made everything accessible to masses – be it information, everyday supplies, social interaction and even investing and trading. The last decade has witnessed a tremendous spike in the online trading figures across the world, and South Africa too has seen growth in online trading & platforms. New online technologies in trading like MetaTrader, CTrader, Mobile Trading have lowered the barrier to entry for investors. Moreover, the sector is highly regulated & organized which has encouraged many new trading platforms to start and offer low-cost services. One only needs an internet connection and a device like smartphone or PC to trade different investment instruments online. The recent impact of Covid-19 and resulting social distancing norms have made a further shift towards online portals for trading various instruments. Investors are now moving from traditional offline trading platforms to online trading, plus millennials in SA are also exploring online trading. But online trading has its complexities and risks, that investors must be aware of before proceeding with any investment. New traders need to keep a few points in mind before putting any money into trading:
- Understand the Market Regulations
The Capital markets in South Africa are well-regulated and organizations like – Financial Sector Conduct Authority (FSCA) and Johannesburg Stock Exchange (JSE) play an important role in online trading by overseeing local trading platforms and ensuring the safety of the traders and investors. The JSE market regulation monitors stocks and futures & option derivative markets. For any broker to provide stocks and derivative trading services, it is essential to obtain a license from JSE. Hence, traders in South Africa should never select a stockbroker that does not have a regulatory license issued by JSE. While FSCA supervises and regulates South African forex brokers & CFD platforms which includes the trading in forex market & CFDs on various instruments like forex, commodities, cryptos, indices, etc. Forex and CFD traders should always seek for a broker that is regulated by FSCA. FSCA licenses all the CFD brokers as ‘over-the-counter derivatives provider’ under (ODP) license and supervises their trading activities through their constant reporting requirements & system. There are also some Brokers that offer services in SA but are based in foreign jurisdictions, traders should avoid them in case they don’t hold a license from credible top tier regulators like FCA of UK or ASIC of Australia. Investors need to understand all the trading regulations in South Africa before trading any instrument.
- Investing in Education
“An investment in education pays the best interest” – Benjamin Franklin It is very important to have a decent knowledge of trading online and the instruments that you are dealing with. A majority of new traders lose money while trading online due to a lack of education and strategy. You can start by learning the basics of fundamentals & technical analysis from resources like Investopedia. It is important to have a goal or trading objective which should be focused on while executing trades. Apart from learning the basics, new traders should always go for a demo account where they can trade with virtual money to gain experience and expertise before making actual trades. Remember: Learning and Training are important before you start investing.
- Understanding Trading Instruments Available
One advantage of going online for trading and investments is the variety of investment options. Just like hundreds of alternatives in online shopping, there are multiple instruments available in online trading. It is important to identify the most suitable trading instruments and understand the pros and cons before executing any trade. Each instrument has different features and is ideal for different types of investors. The returns, risks, tenure, investment amount, should be suitable with the investment instrument chosen by the traders. South African traders can legally trade and invest in FX, Stocks, ETFs, Derivatives, CFDs and many more instruments. Each instrument has different features and is ideal for different traders. Once the ideal trading instrument is identified, traders should seek for the most convenient and efficient broker or dealers that are offering the instruments.
- Choosing a Trading App or Online Broker
The trading application plays an important role in online trading as it is the platform from which the trades will be executed, updated, or reviewed. The trading apps are offered by online brokers and they have a variety of features, tools for the traders to make informed decisions, mitigate trading risks. Traders should be able to identify the safe, trusted, and best-suited trading app or online broker before starting investing. There are several trading apps available in South Africa which allow trading of multiple instruments. Before choosing any of the available trading app, one needs to understand how to compare & choose an app that suits their trading needs and what needs to be looked in a broker. You should always check and compare the following factors before choosing a trading App:
- Licensed by Authority/Regulators: An ideal trading application or the online broker should be regulated by JSE or FSCA. The foreign brokers need to be regulated by foreign authority apart from JSE and FSCA. Regulations ensure the safety of traders and reduce the risk factor involved with unregulated entities.
- Trading Fees: Each broker or trading app charges a different trading fee for different instruments. The trading fees can be in the form of spread, commission, brokerage, etc. Traders should check and compare all the fees involved before selecting any particular trading application. The fees should be reasonable and affordable for the instrument you want to trade.
- Choice of Trading Platforms/Software: Some brokers have their own proprietary trading platform while the majority of the brokers use Metatrader 4, Metatrader 5, or cTrader platform to execute trades on PC, mobile, and tablet. Traders should be able to identify a broker that offers the most suitable trading platform or app for a better experience.
- Multi-Device Support and Mobile Trading: Another feature that one must look is multi-device support, the trader should have an option to trade on PC or mobile or whatever platform he/she likes. Trading on smartphones is most popular in South Africa and it offers benefits over other platforms as orders can be executed anytime on the move. Online traders should ensure that the brokers they choose offer a user-friendly mobile application with utilitarian functions and features.
- Instrument Availability: Each trading app offers different types of instruments in different numbers. The availability of multiple instruments is highly advantageous as a large number of options can be speculated to book profits. Traders should ensure that the selected broker has multiple trading instruments along with the ones that they are seeking to trade.
- Customer Support: A user-friendly support staff should always be preferred that can solve every query of traders within time. Brokers or Apps with better customer support generally have better ratings on online reviews and they have a history of giving good service experience to their clients. You should read online reviews to compare the service experience of brokers.
Apart from all the above major aspects, a successful trader should focus upon various other factors like experience in the industry, reviews and ratings by experts and users, minimum & maximum deposit/withdrawal, availability in suitable language, transaction methods, account types offered, and any other useful features offered. New traders should look for the broker that allows demo trading with virtual money to gain decent experience.
- Know the Risks
Trading and investing will always possess a risk of losing the invested amount. This risk is of multiple types and cannot be eliminated completely. However, by keeping a few factors into consideration, the risk can be mitigated to a certain level.
- Capital Markets Risk: The price movements in any capital market depend upon multiple factors. Most of the markets are volatile and show unpredictable price movements. This is the most common risk among various trading instruments. This type of risk can be mitigated to some extent by an analysis of market trends and experience in the market and use of risk management tools.
- Unregulated Broker: Unregulated brokers can act in self-interest to cheat on the traders. Choosing a well-regulated broker can lower this risk factor.
- Leverage Risk: Involving excessive leverage in a trade will also involve higher risk factor as sometimes traders end up losing more than they own. Keeping a safe leverage ratio can mitigate this risk.
- Over Trading: Online trading is easy and is available at fingertips which can make traders insatiable. This may lead the trader to invest without analysis and research on risk to reward ratio. Traders should control their emotions and keep a limit on trading figures.
- Online Risk: Online trading has numerous advantages over offline trading but it also adds to the risk factor. There is always a risk of the trading application being hacked which may wipe out the invested amount or the data related to investments. The login credentials of users can also be hacked to execute fake trades for self-interest. Choosing a reliable and regulated broker with multi-step login can mitigate this risk factor.
Bottom Line Online trading has allowed thousands of new traders in South Africa to invest in the capital market with much easier access. The online trading apps have lower fees, high flexibility, easy access & monitoring, and allows traders to execute trades anytime from anywhere. There will always be a risk involved in trading online, so new traders must gain experience and use proper risk management before trading.