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Opinion: What You Must Consider When Choosing An Online Investment Platform
The global financial markets had been on an extended bullish run since March 2020 to the start of April 2021, which many experts say is the result of increased participation by retail investors all over the globe.
The Nigerian All Shares index has been one of the best performing index globally & has grown by nearly 100% from the low in March 2020. This growth has lured a significant number of enthusiast retailers from Nigeria also, and there has been a significant rise in retail trading platforms in the country.
The average daily trading volumes of stocks, CFDs, commodities & cryptocurrencies have all increased dramatically in Nigeria over the last 1 year. Many experts say that the US equities & cryptos may be in a bubble phase, and the extended bull run would end with a market crash, although nobody knows when.
But this has not stopped retail traders from participating in the markets. The cryptos such as Bitcoin have dropped as high as 50% from their YTD high in the last 2 weeks, with BTCUSD going as low as $30,000 on May 19, 2021. Also, many NASDAQ & Nigerian stocks have pullbacks of nearly 30% from their yearly high.
Rahul from South Africa’s Forex Brokers informs the financial markets are constantly being fueled up by the increased participation from the retail traders and investors since the start of the Covid-19 pandemic. And many traders are joining in the lure of quick money & the fear of missing out.
“All this has led to a sudden spike in the demand for online trading and investment platforms in Africa & globally, while ‘Robinhood traders’ has become a hot trend & media topic.”
“Due to an increased demand, a large number of new brokers and trading platforms have entered the market. In such an environment, other than understanding the obvious risks of online trading, it is even more essential to identify a suitable and competent investment platform & protect against scam brokers.”
This guide covers all the necessary elements that must be considered while choosing an online investment platform in Nigeria.
The Need for Investment
Investments in almost every capital market come with a risk, that’s a fact. However, if you do not invest at all, you will not only be missing out on the capital appreciation opportunities but will also be diminishing the value.
Nigeria is a growing economy, but with the inflation rate nearing 16% for 2021, it becomes extremely important to participate in a capital market to maintain the buying power of your money.
One of the reasons that experts say for the increased participation by retail traders in equities & cryptos is because of the low actual returns with other safer instruments, like the Fixed deposit, with which the actual return would be negative after inflation.
Liquid amounts kept in your lockers and bank accounts for the long term are destined to lose their buying power due to rising inflation rates.
Which Capital Market is Right for You?
Once you made up your mind to enter into financial markets, there will be a plethora of options and opportunities. The selection can be perplexing and many investors fail to select a suitable instrument due to lack of knowledge.
Considering the following aspects can assist in making a better decision while choosing the right capital market.
- Define your Goals: Selection of the financial market instrument must be done according to your predefined goals, risk appetite and requirements. Entering the market without any goal increases the chances of selecting a wrong investment.
- Investment Tenure: The selection of investment tools becomes easier if you have predetermined the time horizon of investment. For example, equity mutual funds are considered ideal for long-term capital gains at low risk while the forex market is for short term traders with very high-risk appetite.
Many new investors and traders seek to make quick money and end up choosing highly volatile markets. It must be noted that short-term trading involves high risk and is not ideal for a majority of beginners.
- Age: Millennial investors have a wider range to stretch their risk horizon compared to gen x and older investors. Young investors have lesser financial responsibilities and can stay invested for a longer period compared to older counterparts. Hence, they can go for more aggressive and volatile instruments in their portfolio, while old investors must choose a less risky instrument.
- Risk Involved: Investors must spend adequate time and effort to seek sources of all the risk elements associated with the investment and try to mitigate them. Each market has different components of risk factors. The extent of risk must be checked and compared with the actual potential return expected over the investment term.
- Capital Returns: Each instrument class has a different ability to generate returns although there is no guarantee. For a better understanding of returns, we have compared returns on 1 million NGN invested 1 year ago in Nigerian markets.
| Symbol | Investment Value (22/5/2020) | Current Value (22/5/2021) | Value of 1 million NGN (in Mn) |
| Stock (NGSE Index) | 25,200 | 38,324 | 1.52 |
| Stock (NSE 30 Index) | 1090 | 1,557 | 1.42 |
| Gold | 1725 | 1881 | 1.09 |
| Crypto – Bitcoin | 3,817,994 | 34,500,000 | 9.03 |
| Crypto – Ethereum | 80,888 | 1,017,169 | 12.57 |
The data mentioned is according to the average trading price on the given date.
The capital gains on the forex market cannot be mentioned in the table as it involves frequent buying and selling and is mainly used for short-term trading. The yield on bonds in Nigeria is 10-12% for 1 year which will turn 1 million NGN into 1.1-1.12 million NGN in 1 year at very low risk.
The inflation rate for 1 year can be taken as 18% on an average for the same period. If an investment tool generates a lesser return than the inflation rate, it is bound to face inflation risk.
Investors can also distribute their investment amount over multiple capital markets to balance their risk factors according to investment goals and objectives.
Selection of Investment Platform
Once you are certain of the capital market & the instrument that you want to invest in, only then you can narrow out the list of investment platforms that can be chosen.
Some platforms offer multiple trading instruments but their service and offerings might not be similar and optimum for each investment or asset class.
Following aspects of comparison can further assist in choosing the right investment platform for oneself.
1. Safety
The safety of hard-earned money is more essential than the capital gains on your investments. Safety can be ensured through regulation and transparency of the investment platform.
It must be ensured that the selected investment platform is regulated by the concerning financial regulatory authorities. Transparency of financial statements and holdings can further enhance the trust factor.
The stock market, mutual funds, and many other capital markets are regulated by the Nigerian Securities and Exchange Commission (SEC) and Central Bank of Nigeria (CBN). Stockbrokers also require a license from Nigerian Exchange Group (NGX) to offer local and global stocks in Nigeria.
Recently many new-age Investment tech platforms were banned by SEC because they allowed Nigerian customers to trade unregulated securities like foreign stocks. This means that Nigerian traders can only trade locally listed stocks & other securities legally.