Should I trade Stocks or Forex in Nigeria?

Trading stock has to do with buying shares of a company listed on the Nigerian stock exchange (NGX) and selling it when the value appreciates. Currently the NGX has about 241 listed equities on its floor so traders have lots of options to choose from.

Forex trading on the other hand has to do with using one currency to buy another for purposes such as speculation and hedging currency risk. Forex trading is done over the counter as there is no physical exchange location. We will compare stock and forex trading in Nigeria using three benchmarks: Regulation, liquidity and risk.

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

The SEC has also established a National Investor protection fund (NIPF) to compensate investors that suffer pecuniary loss when a capital market operator fails to meet their contractual obligations due to bankruptcy, fraudulent acts by the capital market operator or their staff.

For forex trading by individuals, there is no regulation in place yet. The SEC have said that anyone engaging in retail online forex trading does so at their own risk. In Nigeria, only Banks trade forex between themselves in the inter-bank market.

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

Forex traders in Nigeria do not qualify to benefit from the NIPF compensation fund should 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 stop insider abuse and diversion of clients’ funds, the SEC in Nigeria has now made DCS mandatory except a trader chooses to opt out.

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

However, with DCS, sales proceeds go straight to the traders account without passing through the broker’s account. This ensures transparency and is a good regulatory move. DCS is applicable to only SEC regulated stockbrokers in Nigeria. International forex brokers are not mandated to implement DCS as they are not regulated by SEC.

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

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

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

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

In the stock market you face four types of risk which could make you record a loss whenever you trade:

  • Market risk– The possibility that you might be wrong in your price speculation. You might buy a stock hoping the price will appreciate but the price drops instead and you are faced with 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 cannot adapt quickly, competitors could outperform them.
  • Regulatory risk– The possibility that the regulators of a particular sector could thereby stiffen regulations forcing companies that cannot meet the new requirements to quit or move to other countries. Dunlop and Michelin Tire companies in Nigeria were affected by this risk and had to leave the country.
  • Business risk– The probability of a company making a loss hence driving its share price down and preventing it from paying dividend to shareholders.

When trading forex in Nigeria you encounter the following risk:

  • Counterparty risk– This are the chances that your forex broker could be unlicensed or even though he is licensed, he could embezzle your funds. This is a major risk for Nigerian retail forex traders because they have to patronize international brokers as the SEC has not licensed any local forex brokers and is not even in support of forex trading. Scam forex brokers target markets like Nigeria because of the absence of government regulation.
  • Leverage risk– Leverage has to do with taking a loan from your broker to trade. When trading forex you have to use leverage based products like contract for difference to benefit from price fluctuation without actually buying the currency. Using too much leverage puts you at risk of losing all your capital and even owing money to your broker. In countries where forex trading is regulated, the governments limit the amount of leverage brokers can offer to traders. However since retail forex trading isn’t regulated in Nigeria, some brokers entice traders with excessive leverage and they end up losing all their capital.
  • Currency risk– The exchange rate of a currency can fall very fast in the forex market. News reports, politics, conflict, monetary policy, etc. could make a currency lose value. Sometimes even when risk management mechanisms like stop loss orders are deployed, exchange rates can still gap past the set stop price. This will make you execute your market order at a lower price than you had envisioned and you record some loss. The forex market is notorious for this kind of volatility.
  • Risk of failure– Statistics show that over 85% of forex traders lose money. This is partly due to factors such as the volatility of the market, gamification of forex trading, inadequate trading knowledge, FOMO trading, etc.

Benchmark

Stock Trading

Retail Forex Trading

Regulation

Regulated

Unregulated

Risk

Medium

High

Liquidity

Medium

High

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

Firstly, Stock trading is properly regulated and has an investor compensation fund so regulation is excellent. Retail forex trading is not regulated in Nigeria so regulation is poor.

Secondly, Stock trading has certain manageable risk so risk is medium. Forex trading has a high failure rate of over 85%, high volatility, and the lack of local regulation makes it highly risky so the risk is rated high.

Thirdly, Stock trading on the exchange ensures some liquidity but there are about 241 listed stock to choose from so liquidity is medium. Forex trading is highly liquid with a daily turnover of $6.6 trillion so the liquidity is rated as high.

Online trading is risky business as nobody, not even the smartest robots can predict market movements. With this in mind, traders should not take on additional and avoidable risk. Forex trading is not regulated in Nigeria and has a high loss rate as most traders lose money. If you must trade in Nigeria, it is safer to trade in the stock market where at least there is government oversight and manageable risk.

Leave a Reply