BUSINESS NEWS - Currency trading or forex trading refers to the trading of currencies with the aim of profiting from exchange rate fluctuations. Currency trading has been gaining in popularity in African countries including South Africa.
Earlier, forex trading was reserved for institutions and multi-national corporations, however, forex trading has now been opened up to retail investors.
Since the start of the coronavirus pandemic, numerous people from South Africa have turned to forex trading as a means to make money remotely. Over the last decade, there has been a proliferation of online brokers that offer forex trading services. However, forex trading is risky and the chances of losing money are high.
Here are 7 common questions (and their answers) that people have about forex trading in South Africa.
How do the currency markets differ from other financial markets?
The currency markets are unique in nature. There are a few key ways in which they differ from other financial markets such as stocks, bonds, and mutual funds.
Stocks vs. Forex
Apart from the obvious difference that the stock market deals in shares while the forex market deals in currencies, both the markets are different in terms of trading hours, liquidity, and the factors that influence price fluctuations.
Forex is a global market. In that sense, the market is open 24 hours a day on all weekdays. However, the stock market is only open for a small number of hours each day. This means that it is easier to monitor the stock market since the forex market can move even while you sleep.
Liquidity refers to how much trading activity there is in the market. The forex market is the most liquid market in the world since the trading volume is very high. The daily trading volume in the forex market often crosses trillions of dollars. In comparison, the stock market is much less liquid.
Even though the shares of blue-chip companies see a lot of activity, the liquidity falls quickly once you move away from them.
Even though the primary factor driving prices in both markets is supply and demand, that's where the similarities end. The forex market moves based on macroeconomic factors between two countries (since you’ll be dealing with two currencies when you make a trade). However, it is much simpler to evaluate stocks since you only need to be concerned about that company’s performance metrics, developments, and sector.
Bonds vs. Forex
When you purchase a bond, you can forget about it for years until the maturity date arrives. This is essentially different from the forex market in which you have to be much more active. The forex market is highly volatile and moves quickly throughout the day. It demands a much more involved investor when compared to the bond market.
Further, in the bond market, you need to pay the whole amount of investment upfront. But in the forex market, you can make trades based on leverage or margin money by borrowing money from the broker. This means that you can make trades of $50,000 worth of currency while only investing $1000 of your own money.
Mutual Funds vs. Forex
Mutual funds are managed by a professional investment manager, whereas, in the forex market you’re on your own. Mutual funds usually have a specific investment strategy (for example, they only invest in blue-chip companies or they only invest in overseas US stocks, etc.). Mutual funds usually only invest in stocks, in that way, mutual funds are related to the stock market.
However, for the forex market, you have the option of investing or trading in a very wide of currencies (although most traders focus on a few currencies that they understand well). Trading in the forex market is also considered a riskier endeavor when compared to investing in mutual funds.
Is currency trading legal in South Africa?
In short, yes. Currency trading is absolutely legal in South Africa even for retail traders.
Forex is offered to South African retail traders in the form of CFDs or OTC derivatives. The CFDs are short-term speculative instruments and can be used to trade with high leverage.
The Financial Sector Conduct Authority (or the FSCA) is the government authority that regulates retail forex trading in South Africa. The FSCA licenses and monitors forex brokers in South Africa that offer their forex and CFD trading services to both South African and international investors.
Brokers must apply for FSP number from FSCA and must register for Category I License for offering derivative instruments and they must also apply under FSCA’s new ODP licensing regime meant for OTC derivatives providers before they can offer CFDs.
You should never trade forex with a broker that is not licensed by the FSCA for safety reasons. The licensing helps to ensure that the broker has oversight over its operations. It also works to prevent scams and money laundering.
Regulated Forex Brokers are required to follow strict FSCA’s code of conduct, policies and they must also follow strict reporting procedures mandated by FSCA. And Investors can file for their complaint with FSCA or with Financial Advisory and Intermediary Services Ombud (FAIS) to get redressal of their grievances.
Strong regulatory framework has attracted many international investors to invest with SA based brokers. Investors from all over Africa trust and trade with SA’s FSCA regulated brokers to speculate on various CFD derivatives ranging from FX, Commodities and Indices.
How to open a currency trading account as a South African resident?
There are four basic steps involved in getting started as a forex trader in South Africa.
Choosing a broker - The first step is to choose a broker that you want to trade through. Only choose a broker that is regulated by the FSCA. There are several global forex brokers that are now licensed to operate by the FSCA, so finding them is not hard. You can do a quick search on Google like “FSCA regulated forex brokers” to find them.
According to Forex Beginner South Africa, Before proceeding to sign up with a broker, you must also check their FSP number and verify it on FSCA’s website. The FSP number is normally displayed at the bottom of Broker’s website.
Besides checking the broker’s license number, you should also check other factors such as pricing and fees, customer support, instruments offered, bonuses offered, and so on while choosing a broker.
Registering with the broker - This is the simplest step. You need to open an account with the chosen broker. Usually, it only takes around 10 minutes. You will need to provide basic details about yourself and choose the type of account that you want to open.
Completing KYC norms - You will need to provide certain documents as part of the KYC process mandated by the FSCA. Make sure that you have your identity proof and address proof ready before you register with a broker. The KYC can now be done completely online, so it’s typically a fast process. It may take up to a week for the broker to verify your KYC details.
Setting up the trading platform - Each broker offers a trading platform. You can execute your trades through the trading platform. You will need to download the trading platform and sign into your account to be able to trade. It may take a while for you to understand all the functionality of a trading platform.
What are the fees that you need to be aware of?
Each broker has a different fee profile. The fee profile usually consists of spread, commission, deposit and withdrawal fee, overnight fee (or swap rate), and inactivity fee. Before signing on with a broker, you should check all of the above.
The most important ones are the spread and the commission. The spread is the difference between the Bid price and Ask price (discussed later in the article) while the commission is a fee per trade.
Usually, if the commission is high then the spread will be low and vice versa.
What currencies can you trade?
Almost any currency in the world can be traded. Different brokers offer different sets of currencies that you can trade. The USD (or American dollar) is involved in around 75% of forex trades in the world. The most popular currency pair is the EURUSD.
Some other currency pairs that you should know about are USD/JPY, USD/GBP, ZAR/USD, and so on.
Currency pairs that are offered by brokers can be divided into major pairs (most traded), minor pairs (less traded), and exotic pairs (least traded).
What are the forex terms that you need to know?
There is certain forex trading jargon that you should know of.
Bid Price - This is the price at which you can open a long position with respect to a given currency pair.
Ask Price - This is the price at which you open a short position with respect to a given currency pair.
Spread - This is the difference between the Bid price and the Ask price. The difference is essentially the fee that the broker is charging for executing the trade.
Quote - The quote is the price of one currency expressed in terms of another. For example, the quote is usually written as USD/EUR - 0.8613
Pip - A pip is used to refer to the smallest price that an exchange rate can make.
Can you make money in forex trading? What are the risks?
Yes, it is possible to make lots of money in forex trading. However, it is also possible to lose a lot of money. Forex prices fluctuate wildly throughout the day. Further, the amount of profit or loss is increased by the use of leverage offered by brokers.
To limit risk, you should only trade through a broker that offers negative balance protection. Negative balance protections means that your account balance cannot go lower than zero. This ensures that you do not lose more money than you have in your trading account.
Forex trading is meant for experienced traders. If you’re a new trader, then you should spend your time learning about forex trading and start trading only with a demo account where you can trade with virtual money in a simulated environment. Once you have gained enough experience only then you must proceed with actual trading environment.
Forex trading is also highly speculative in nature, so it might not be suitable for most investors.
Wrap Up
Forex trading requires dedication and precision. It is not a guaranteed way to make money, but experienced traders can do well for themselves. Remember to understand the risks of forex trading and learn how to mitigate such risk before starting your trading journey.
Article supplied by Forex Beginner SA.
