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All You Need to Know About Trading in Currency Market

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currency trading

Online trading of currencies is gaining momentum all around the world since the last two decades. Africa alone today has estimated approx. 1.3 million forex traders, South Africa and Nigeria are the leading countries with around 400,000 traders locally combined.

The currency market is a decentralized international financial market where buying, selling and exchange of global currencies among buyers and sellers take place.

In the currency market, the values of currencies are determined based on supply and demand, and it is the largest financial market with transactions crossing over $6.6 trillion per day.

The bulk of currency trading volume comes from trading between banks, institutions, governments and companies. But approximately 5.5% of trading volume constitutes of retail investors and this figure is growing.

The advancement in internet, electronic trading tech, the rise of low-cost brokerages and the availability of diverse trading platforms to African traders have caused online trading to gain popularity among retail investors in Africa, especially Nigeria and South Africa.

How does currency or Forex market work? What decides currency rates?

Currency trading is the buying, selling and exchange of currencies like Euro or the US Dollar or any other two currencies against one another; where you give one currency to get another.

If you have travelled abroad or ordered something online from a different country in another currency like EUR or USD, then it is likely you have made a forex transaction.

Currency trading always involves trading between a pair of currencies. In contrast to stock trading where you buy a company’s share, it involves taking a position on a currency pair.

For example, GBP/USD represents the value of how much US Dollars you can buy with one Pound.  If you think that Pound’s value will rise, you buy GBP with dollars. If your prediction is right, you could make a profit. Similarly, you can trade any other currency available in the Forex Market.

FX or currency market works on a simple economic concept of demand and supply. For instance, if there are more buyers for the US dollars in the market, its value will appreciate and vice-versa.

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The demand and supply are affected by global trade, geopolitical events, interest rates and financial news. These factors create volatility in the currency market which in turn creates an opportunity for traders to speculate on the movements of currency prices.

For example, if the US Federal Reserve announces a higher interest rate, then US dollars will appreciate and other weaker currencies will likely depreciate against it.

What differentiates FX from other financial markets is that it operates 24 hours in different time-zones. It means when the trading day ends in the US, it begins in Japan and Hong Kong. That’s why currency prices are constantly changing.

How are currencies traded?

Currencies are always traded in pairs like EUR/USD or GBP/EUR.

There are mainly four ways how institutions, companies and individuals trade in FX market: spot contracts, swaps, forward and options. Swaps account for roughly 50% of the total FX trade.

Forex Spot, Forward and Swap Contracts

Most actual trade or non-speculative trade of currencies between banks, corporations, the governments take place using contracts like spot, forward and swaps.

In the Spot FX, currencies are exchanged at the current market price or exchange rate. Spot trades are usually settled within 2 days of contract and the majority of currency trading takes place through swaps.

Swap, also known as a cross-currency swap, is an agreement between two parties to exchange two different currencies at a predetermined spot-rate over a period of time. Swaps are more common among financial institutions or governments. Global companies usually get into a currency swap mainly for securing cheaper debts.

The forward contract is similar to spot trading, except in this the currency exchange occurs in the future. A forward contract entails an agreed-upon exchange rate, volume and a specified maturity date. When the contract reaches it maturity date, the buyer has to pay the amount at the agreed-upon exchange rate. The buyer may incur losses if the current spot rate is lower than the pre-agreed rate.

Currency Derivatives

Currency derivatives are of two types options or futures. Currency derivatives are considered one of the best options to manage currency-risks. They are usually exchange-based futures and options contracts. These future-oriented currency contracts can be purchased at a predetermined price and date.

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FX Options is a contract where a buyer obtains the right to buy foreign currencies from a seller at a specified rate and date. The buyer, however, is not obligated to buy it. Similar to insurance, the buyer just needs to pay the premium to buy an FX Option. FX Futures contract is similar in nature but parties are obligated to settle the contract.

Multinational corporations usually use FX Options to protect their investments from currency fluctuations.

Locally in Nigeria, the Nigerian Stock Exchange (NSE) is planning to introduce financial derivatives next year. Currently, LCSE offers trading in four asset classes including currencies (both local and foreign). In the rest of Africa, JSE offers currency derivatives on all major currencies against ZAR.

Currency CFDs

A contract for difference (CFD) is an agreement between the two parties (trader and broker) to exchange the difference in the price of an underlying asset at the end of the trade. The difference in price is calculated from the point when the contract opened to when it ended. In CFD trading, neither broker nor the investor owns any underlying asset.

Most retail forex traders trade forex online as CFDs with retail forex brokers. But there are no locally regulated forex brokers in Nigeria.

All the best forex brokers available in Nigeria are foreign brokers that offer CFDs on currency pairs. As online forex trading is still unregulated in Nigeria, traders must ensure they only trade with top-tier regulated brokers for safety of their funds & fair-dealing; like through brokers regulated by FCA or ASIC or CySEC.

How currency trading can be risky?

The Forex market is inherently risky. The risks range from market risks like extreme volatility to other risks like the use of high margin.

Here are some of the risks that you should watch out for:

Market volatility and unpredictability

The forex market can be highly unpredictable. The release of a new economic data or a new bilateral/regional trade deal can cause volatility in the Forex market.

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Major currency pairs tend to remain relatively stable. But exotic currency pairs which have lower trading volumes can be very volatile.

Volatile currencies tend to move in any direction based on a market event or even without it in some cases. The unpredictable movement can cause huge losses.

Leverage and margin risk

The availability of high leverage is one of the reasons why currency trading is why so many traders get attracted to it.

Leverage can amplify a trader’s profit but at the same time, the unwise use can cause significant losses.

For example, in a 100:1 leverage factor, a trader could trade USD$10,000 with just $100 margin deposit. So, suppose a currency pair made a 1 pip loss that means loss of $1. If it changes to 50 pips loss than half of your margin money could be gone in seconds.

Counterparty or third-party risk

Risks related to counter-party or market maker or Broker, where they are not able to fulfil your contract or order due to credit risk or volatile market conditions is another major risk factor. And sometimes these counterparties also deal in malpractices.

There have been numerous instances in the past when people were fooled through Ponzi schemes & bad brokers. For the safety of your capital, one must always choose a broker that is regulated by multiple Tier I and Tier II regulators.

Other risks to know

There are other associated risks too with trading currencies including Country risk, Interest Rate Risk, Transaction Risk, Liquidity Risk etc. One must understand all these risks and try to mitigate them before trading.

Another major risk is of losing money. There is no denying that Forex trading is very risky. Roughly 60-70% of traders lose their capital due to different reasons. However, unwise use of leverage is considered one of the top reasons for trading-losses.

One can possibly mitigate some of these risks by adopting a sound trading plan, using leverage (max 1:10) and proper risk management.

Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan. Mr Olowookere can be reached via dipo.olowookere@businesspost.ng

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Economy

SEC Introduces Regulatory Incubation Program for Fintechs

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fintechs

By Modupe Gbadeyanka

A regulatory incubation (RI) program for financial technology (fintech) companies operating or seeking to operate in Nigeria has been introduced by the Securities and Exchange Commission (SEC).

A circular issued by SEC disclosed that this framework would be officially launched in the third quarter of 2021 and will operate by admitting identified Fintech business models and processes in cohorts for a one-year period.

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Participation in the RI program will encompass an Initial Assessment Phase and the Regulatory Incubation Phase.

The categories to be admitted into each cohort will be determined based on submissions received through the Fintech Assessment Form and communicated ahead of each take-off date.

SEC explained that the scheme was designed to address the needs of new business models and processes that require regulatory authorisation to continue carrying out full or ancillary technology-driven capital market activities.

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The RI Program has thus been conceived as an interim measure to aid the evolution of effective regulation which accommodates the innovation by fintechs without compromising market integrity and within limits that ensure investor protection.

It was disclosed that review of completed Fintech Assessment Forms will continue on an ongoing basis and those who consider that there is no specific regulation governing their business models or who require clarity on the appropriate regulatory regime for seeking the authorisation of the commission, are encouraged to complete the Fintech Assessment Form.

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Economy

NGX Suspends Trading on GTBank Shares Ahead of Delisting

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GTBank Branch

By Dipo Olowookere

In preparation for the eventual delisting of shares of Guaranty Trust Bank (GTBank) Plc from its trading platform, the Nigerian Exchange (NGX) Limited on Friday, June 18, 2021, placed the banking stock on a full suspension.

GTBank, a tier-one lender trading its equities on the exchange, intends to transform into a financial holding company (Holdco) so as to offer a wide range of services it is restricted to do.

Some years ago, the Central Bank of Nigeria (CBN) directed banks in the country to offload their subsidiaries not performing core lending services.

This was after many deposit money banks (DMBs) were delving into different business ventures, including insurance, stockbroking, asset management, amongst others.

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For the CBN, which regulates the banking industry in Nigeria, most of these banks were losing focus and were not supporting businesses that need funds to grow and then stimulate the economy in the process.

To address this issue, the apex bank asked banks to sell off their non-banking assets and this forced many of them to offload their companies not offering core banking services.

However, there was an opening for banks to still delve into other sectors within the financial and capital markets and this was by operating as a Holdco.

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A few of them towed this path, including FBN Holdings, Stanbic IBTC Holdings and FCMB Group.

Not wanting to be left out, GTBank is joining the party and to achieve this, it is delisting its banking arm, which is the popular GTBank from the stock exchange.

GTBank will now operate as a private company, while the new Holdco, Guaranty Trust Holding Company Plc, will now be a public company. The shares of this new firm will be listed on the NGX after the delisting of GTBank.

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Last Friday, the stock exchange informed the investing community of the latest development, announcing the suspension of trading on GTBank shares.

In the circular sighted by Business Post, the NGX explained that the rationale behind placing GTBank stocks on full suspension is to “prevent trading in the shares of the bank” in preparation of its “eventual delisting”

Before trading on its stocks was suspended on Friday, GTBank closed at N28.55 on Thursday after appreciating by 50 kobo or 1.78 per cent.

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Economy

DLM Capital Remains Best Structured Finance & Securitization Team in West Africa

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DLM Capital

A prominent developmental investment bank, DLM Capital Group, has emerged winner at the Capital Finance International (CFI) 2021 awards as the best-structured finance and securitization team in West Africa.

This award has been won consecutively in three years and affirms the group’s strong performance as a leading investment institution and asset manager.

CFI awards seek to identify the contributions of individuals and organizations that contribute significantly to the advancement of economies and truly add value for all stakeholders.

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DLM Capital Group creates bespoke business solutions for alternative financing and harnessing funds for growth.

The group focuses on four key sectors — consumer credit, agriculture, microfinance, and education with a mandate to reduce poverty and improve living conditions for Africans while mobilizing resources for the continent’s economic and social development.

“In the past three years, our portfolio management team’s performance has remained consistent, and our clients have benefited immensely from exposure to our solutions, including the NMRC securitization deal and the DLM Primero BRT Securitization,” said Head of Corporate Communications and Marketing, DLM Capital Group, Ms Chinwendu Ohakpougwu.

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“We are positioned to provide services to an expansive client base of retail, high net-worth and institutional customers.

“DLM Capital Group remains committed to constantly providing financial solutions that will enable our clients to make a difference, and we are honoured to be recognized once again as a reflection of the quality of support offered to our clients,” she added.

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DLM has won recognition in West African capital markets, acting as a sole arranger to over 80 per cent of structured finance transactions in Nigeria — and all the securitization transactions. It provides deal structuring, advisory execution and capital raising services across the Nigerian capital market.

The institution recently launched an asset financing scheme and is preparing a venture into digital banking under its subsidiary, Sofri.

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