Forex trading in SA: what investors need to know
Retail forex trading is growing in popularity and volume in SA
With an average daily turnover of $5.1-trillion in 2016, the foreign exchange (forex) market is the largest and most liquid financial market in the world.
Retail forex trading, a small segment of the global currency market, constitutes about 5.5% of the entire forex market’s volume (the remainder being large financial institutions, banks and governments) and is growing in popularity and volume in Africa, specifically in SA.
Through retail forex brokerages, small investors and individuals can invest in this market. Advances in technology, higher internet penetration and increased competition among brokerages have reduced the transaction costs of trading. Digital trading platforms have made the forex market more accessible to retail investors, who can make long- and short-term investments or speculate on the currency movements, entirely online.
SA is by far the largest retail forex market in Africa
According to data by the Bank of International Settlements, the daily trading volume of retail forex trading in SA stood at $19.1bn in 2017, making it the highest volume in Africa (according to ForexBrokers.co.za). By comparison, Nigeria, the second-largest forex market on the continent, has an estimated daily retail forex volume of less than one-10th of that of SA.
While the dominating currency in the global retail forex market is the dollar, the rand is the 20th-most-traded currency and is projected to improve.
Drivers of growth in SA
Tightening regulations in Europe in the retail forex space and strict leverage caps have made brokers look outside to reduce their operational costs and expand their markets. This has made Asia and Africa attractive destinations, and SA has become the new hub in Africa for many regulated European brokers.
The strong regulatory framework of SA’s independent regulator, the Financial Sector Conduct Authority (FSCA), and the country’s strong banking relationships with global economies are the main reasons why forex brokers are setting up offices in SA.
Forex trading options for South Africans
SA investors can trade in forex using the JSE's currency derivatives or through contracts for difference (CFDs) and forex spot trading via regulated forex brokers.
1. Currency derivatives (CDs)
The JSE provides a range of instruments involving currencies that investors can use to trade in forex.
Derivative instruments are financial contracts whose value is linked to the value of the underlying asset. Hence, a currency derivative’s value lies in the value of the underlying currency or the basket of currencies it tracks.
CDs are popular instruments to hedge against future risk with corporates for exports/imports; with investors for portfolio diversification; with traders for profits through speculation; and with arbitrageurs looking for price differentials in different markets for similar products.
The JSE offers a range of currency derivatives on-exchange trading. Those derivatives track the rand exchange rate against the US dollar, the pound, the Australian dollar, the Japanese yen, the Chinese renminbi, the Swiss franc and other currencies. Clearing and settlement are done by JSE Clear, the clearing house of the JSE. Every transaction is cash-settled in rand, with no physical delivery of the underlying foreign currency.
The three main types of derivatives on offer at the JSE are:
- currency futures,
- currency options, and
- currency quanto futures, among other options.
South Africans can legally trade forex derivatives through a JSE-registered broker, which fulfils the regulations laid down by the JSE. One cannot directly go to the JSE to purchase derivatives, hence a broker is essential. The broker acts as a gateway between you and the JSE, executing your orders. The type of broker to choose depends on the investment style, time frame and risk tolerance required by the investor. The JSE website details how to find a JSE-registered broker, open an account and place orders.
2. Spot FX/retail FX
Spot FX, as the name suggests, is an agreement to buy or sell one currency against another “on the spot” or immediately. Payment and delivery are instant, which distinguishes it from currency derivatives. If the buy currency value rises in future, the holder may sell it for profit by selling it.
In spot FX, the currency values change in pips, which is a percent of a percentage change in value. For example, if the spot price of dollar or rand is 14.5645 and changed to 14.5646, it is equivalent to one pip. For each pair, a pip has monetary value and profits are calculated against the change in pips multiplied by its value.
Investors looking to trade in spot FX or CFDs can do so legally via SA forex brokers regulated by the FSCA or any foreign tier-one regulators such as the UK's Financial Conduct Authority or the Australian Securities and Investments Commission. You can verify brokers’ credentials or complaints before dealing with them at the FSCA website’s FSP search. Brokers that abide with global regulations are much better when it comes to the safety and transparency of funds.
What you need to watch out for
Scams: As money coming in from all kinds of investors, South Africans have become prone to scams in the name of forex and cryptocurrency. The digitisation of the entire trade life cycle has made it easier to defraud gullible investors via the internet, as the FSCA has warned.
Con artists flaunting riches on social media, WhatsApp investment advisers allegedly representing a global broker, or unlicensed brokers promising to bring in huge returns are red flags and should be avoided at all costs.
ForexBrokers.co.za advises investors to trade only with FSCA-regulated brokers, to educate themselves, and to trade legally and safely to avoid being scammed.
Leverage: Leverage offered by brokerages is a main risk that cuts both ways. With, say, a 300x leverage on offer, just by making a small deposit, such as R1,000, a retail investor can take a position of R300,000 (300 x R1,000). With that position size, while profits can come at lightning speed, a few pip moves against you can wipe out your entire trading account – and this happens often.
The solution lies in working on the behavioural aspects and not using leverage higher than 1:20 until you are confident enough and has developed the right knowledge. Effective risk management goes a long way to reducing your risk.
This article was paid for by Forex Brokers SA.
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