Is online trading a safe way to invest in markets?

COVID-19 has definitely disrupted several economies resulting in catastrophic losses but if one were to look at the financial markets’ conditions, it doesn’t really paint the same picture.

The ease of trading securities over the internet via smartphones and web trading has led to massive surge in the number of market players.

Stocks and Indices are all time high in all major exchanges worldwide due to bull run by retail & institutional investors who are betting in the markets despite slowdown in economies.

Online trading grown has grown around 400% post Covid-19 with rising popularity among retail investors who are trading stocks, forex & commodities.

Many investors are trading on US stocks like Gamestop, Tesla etc through Robinhood, Cryptos online through Etoro, Plus500 etc.

According to Forex Brokers from South Africa, the leading CFD & Forex brokers in Africa and worldwide reported their all-time high volumes in 2020.

Cryptocurrencies are also at their all-time high in 2021. Online stock brokers like Robinhood, E-Trade, Easy Equities have also reported high numbers in 2020-2021.

African retail investors are increasingly investing online on Stocks, Cryptos & Forex. Online trading is now easily accessible to many users via smartphones making it a game for many first-time investors.

An industry which was once a playing field for only large market players is now being impeded by fairly inexperienced traders. While for experienced investors online trading has been a helpful tool, but for new investors it poses many risks.

The pandemic is pushing new boundaries in the financial markets and unprecedented events are starting to take place due to widespread participation of new users.

Growing number of Concerns

Social media manipulation and herd behavior is playing into markets causing the surge in volume and rise in certain stocks.

A recent story was doing rounds on Web & News that left the entire world surprised on how group on traders manipulated stock of GameStop causing billions of dollars in losses to hedge fund.

GameStop shares were driven up by an army of traders from a reddit forum called WallStreetBets while going in war against multi-billion-dollar hedge funds and bankrupting them.

What was once started as a lesson for short-sellers has become a trend in the market wherein traders are buying other stocks while going up in arms against multi-billion-dollar hedge funds.

This sudden change within the market conditions has baffled millions around the world, especially businessmen like Elon Musk who are in awe of what’s happening.

Though this situation is offering respite to a few traders who have been largely affected by big market players in the past, it doesn’t really bode well for the future.

For example, imagine if a group of small-time investors can bankrupt millions by conspiring against big time players and the public decide to get in on this and invest?

What would happen if there’s a market crash all of a sudden? Can the public even bear the losses?

The GameStop situation serves as warning to all investors in the market that nothing is constant and small causes can ignite drastic market changes.

But this also begs the question that is it safe to consider online trading as a proper investment platform especially with the market volatility?

There’s a famous saying that stock market is not the economy. This is exactly the situation here since the stock market reads completely different to what the economy indicates.

Tweets by major influencers Elon Musk, Snoop Dogg affect the market prices like in case of Altcoin Dogecoin’s bull run after tweet by Musk, then it came crashing down.

Bitcoin price soared above $40,000 after Musk announced his company invested $1.5 billion in it and they will accept the crypto in future.

Market sentiment is affected by social media influencing or fan following rather than analysis. Is this a good thing?

On top of this, many online trading apps are providing investing as a lifestyle product, some are even promoting high risk products without proficiency checks and proper risk warnings.

So, it brings us important question, is online trading really safe?

Investing vs Betting – Users often invest in Complex financial instruments without knowing risks

There’s a thin line between gambling and investing, while one might seem highly unethical; the other one isn’t too far away. A closer look between the two taking into account all factors will help realise that they are the same after all.

While gambling at the casino on roulette wheel, the gambler won’t know what’s the winning number for sure, he uses past information and intuition to place his bets on a potential winning number.

This is the same case with investing, an investor makes the decision to buy or sell a stock based on past performance and the market conditions, the investor just like the gambler isn’t highly secure of his investment but he’s offered more surety in terms of stable factors affecting market prices.

But imagine a scenario like GameStop where the whole market is torn apart, can you differentiate between a gambler’s risk and an investor’s risk?

Just like the casino, investors have different methods of investments some of which are highly dangerous if one doesn’t know the risks associated with it.

A good example over here is to consider the case of CFD’s. At first, the earning possibilities surrounding CFD’s will make any investor eager but do you think the investor will have the same level of eagerness and excitement if he comes to know that he can lose more than his investment if his investment goes wrong?

As Warren Buffet once said “A lot of people like to gamble in the stock market,”. “It is insane. To risk starting all over again and losing everything is madness.”

It’s best to adopt a long-term approach when it comes to investing in the stock market and patience eventually pays off. Don’t jump on a bandwagon for the sake of being part of a trend, you never know how badly it can affect you if you foresee the losses.

How safe are online trading apps?

Just because the risks associated are manyfold, it doesn’t mean that investing in markets is bad.

If an investor is completely aware of all the risks and still makes an informed decision, he can go on to make millions.

But it’s important to understand that not everyone is cut out for the financial market. Just because you can invest in stocks, it doesn’t mean that it’s good for you.

There are barely any barriers to entry, anyone can become an investor. There are no requirements at all. All you need to sign up, give in your information, verify your account and deposit amount. There’s no need for prior experience of any sort.

It’s basic human tendency to be drawn to good investment opportunities, it’s on this fact that online trading companies survive.

The concern for an online trading company is not whether or not a user makes profit, the concern for them would be to make a user trade continuously in order to pocket their commission.

Many online trading apps don’t have stricter requirements for onboarding clients so investors without proficiency or experience can invest in markets who trade the markets as a game without any experience or analysis.

All the trading companies make money regardless of your profits and losses, so their motive is not to make you a good trader, their motive is to make you trade.

Adding to the highly volatile market is the unregulated and unlicensed group of trading companies who deceive many investors in the name of investment.

Since users jump into any opportunity to make money, they don’t really consider all the rules and regulations associated with it.

A common man is not required to know of all the laws and regulations concerning trading companies. Though it’s not required, its essential that every investor understands the policies and rules of a broker.

Regulators exist to protect investors from being scammed but know that the regulator cannot protect you all the time. You need to ensure that the trading app or broker you have chosen satisfied all the norms of the reputed regulator such as CMA or FSCA or FCA.

A good place to start would be to check who are all the licensed brokers in your country. For example, for operating in SA and Kenya, CFD & Forex brokers have to be licensed by FSCA and CMA respectively.

But it’s important to know that you don’t have to trade if you don’t want to. Don’t let these enticing offers fool you into dubious schemes. If everyone can earn millions in the stock market, then all of us would have been millionaires by now.

Copy Trading and Unsolicited Advice – Pose Risk and are Not safe

Improper Advice can ruin trader’s career. One of the most controversial yet important decisions in Online trading to be made is whether to opt the route of Copy Trading or not. A popular social investing method promoted by many brokers these days.

For new investors who are lazy to do their own market research or unable to do their own research, Copy Trading could be a good method to follow the footsteps of successful investors and implement their strategies. It allows investors to diversify their investments.

But on the other hand, Copy Trading doesn’t take into account the intentions, reasons of investors to follow a trading strategy.

There might be trading patterns that an investor uses solely for his benefits. An investor can also make investments based on the losses he can handle.

If you follow the same pattern then you too will incur losses that you cannot bear since you made decisions based on someone’s else’s investment and not on the losses you can handle.

Another factor to be considered before making investments is the amount of advice you allow to influence your decisions. It’s always good to take in all advice to ensure that you make an informed decision, but too many cooks spoil the dish.

An ideal way to use the advice given to you is to take it all in and discard what you don’t need. Don’t allow the advice to rattle you up. Advices are given to make you clear.

Caution on Online Trading: Learn the Risks and invest wisely

There are pros and cons to online trading but it all boils down to what’s the reason why you want to indulge in online trading. If you are looking to make a quick buck then this isn’t the field for you. Nearly 60% of the investors lose their money doing online trading.

But if you are into trading for the long run, then you need to do your own research and understand the risks involved and whether you can afford the losses. Having a good risk management strategy in place is a good way to start.

Then choose broker who’s licensed by the CMA and start trading with a demo account to read the market and finally if you are comfortable and confident then go ahead and deposit the money.

Just know that the chances of losing your money are higher than you doubling your money.