The retail trading volume is surging across Africa, led by young traders from Nigeria, South Africa & Kenya. A large number of millennials who were left unemployed during the pandemic & spent increasing time at home have turned to online investing as a new income source.
With the surge in stock markets, cryptos and other financial instruments, many millennials & Gen Z saw this as a once in a lifetime opportunity to make millions.
According to multiple studies, it was revealed that more than half of the Gen Z and Millennial population have begun trading in the wake of this pandemic. Robinhood, a famous trading app in the US, stated that the average age of their 13 million users is 31, most of them being first time investors.
This trend is mirrored in Africa. The trends adopted by young traders around the world have influenced a large sector of the Nigerian population. Youngsters in Nigeria have taken to various trading applications such as Bamboo, Chakka, Wealth.ng and began heavily investing in local and global stocks.
Luno, an African cryptocurrency exchange with large number of users in Nigeria & South Africa, recently reported in March that they have reached a user base of 7 million. Nearly 4.7 million out of the 7 million are users from Africa. To put it in perspective, Luno reported a massive growth of 271% during the pandemic and their trading volume has gone up from $555 million to $7 billion in a year.
Luno is one of the many apps which have made a huge wave during the pandemic. Many Stocks, CFD trading apps in Africa have reported unprecedented growth and most of them expect to see exponential growth in the coming years.
The managing editor at Broker comparison website Forex Brokers South Africa told “The main reason why there is a huge surge in retail trading in Africa is due to wide availability of smartphones & internet access. Most investing apps available in Africa allow simple account opening, after which traders can start to trade stocks, cryptos, CFDs, even worth millions via their smartphones. The reduced barriers to entry have enabled young traders to take part in the market.”
What are African Investors trading?
In Africa, stocks, commodities & cryptos have been the biggest gainers in terms of trading volume growth from the pandemic.
As per reports, leading FSCA regulated CFD brokers have reported as high as 100% growth in their total CFD trading volume, active users & revenue in Africa in 2020. Most of the trading growth is in commodities like gold, indices mainly NASDAQ, stocks & cryptos.
The domestic stocks markets in Nigeria & South Africa are still the main investment for local retail investors looking to invest in equities market. But there has been a significant rise in demand for foreign equities during the pandemic.
The shift to work from home have benefitted many global tech companies. The stocks of so many global tech companies have grown by more than 100% since the start of the pandemic.
Since the bottoming out in March, 2020, the S&P 500 and NASDAQ have soared 81 and 95 percent, respectively. This growth is closely linked to the growth in number of retail traders globally.
In comparison, the growth in African indices have been bit slower compared to US equity indices. JSE’s all-share index has growth by 41% since the bottom level in March 2020. While the NSE All Share index has grown nearly 100% during this time, but net gains are lower due to exchange rate losses
The net returns for investors in US Dollar value are lower. To protect against loss of investments from exchange rate losses, many young investors in Africa have turned to foreign equities & cryptos like Bitcoin.
One of the most popular stocks which skyrocketed during this pandemic is that of electric car maker ‘Tesla’. By January 2021, the searches for ‘Tesla Stock’ had increased sharply by over 250% in Nigeria from the March 2020 levels. In Nigeria, compared to any other stocks, the interest & searches for Tesla stock were the highest.
Other popular stocks such as Microsoft, Apple and Amazon are also very popular among African investors.
There are many Borderless trading apps in Nigeria, South Africa such as Bamboo, Chaka, Trove, Easy Equities which have allowed African investors to invest in African as well as foreign stocks. These apps have seen a surge in number of installs, trading volume, active users, and most of their users are under the age of 30.
Usage of Cryptocurrencies, mainly Bitcoin, as an alternative to unstable local currencies in Africa, have increased the crypto transaction volume in Africa.
Bitcoin has found a large number of investors in Africa. Nigeria for example was ranked second when it came to Bitcoin adoption in the world.
Experts say, due to the volatility in Naira, many people looked for more stable option to hold value. Bitcoin offered investor from Africa a better alternative to hold currency value, and this has been seen as a major reason for the adoption of Bitcoin in many countries where the local currencies are not very stable.
Luno, which is based in South Africa reported their highest trading volume from South Africa, comparatively higher than Nigeria, which was their second biggest market in Africa before the crypto ban in Nigeria.
What are the risks?
Online investing might sound lucrative during a financial market rally, but this usually does not mean that all investors are winning.
Financial markets can be very volatile, especially cryptos, so many retail traders could lose money. Even the most experienced traders & investors cannot predict market movement with certainty.
Currently there are millions of first-time users who are reaping the benefits of the market being on an all-time high, but many renowned investors have called the current situation a bubble. Experts predict that the bubble will burst and the prices will crash, but nobody knows when.
All retail investors who have made quick money also face the risk of losses more than what they have invested.
The first-time traders are still not aware of how to tackle a turbulent market and this is a huge concern. The major stock markets are yet to take a dip, and are rallying. How the amateur investors will handle the market once the market turn remains uncertain. And in a situation when the market does start to fall, many retail investors who have not experienced this situation would likely get worried & scramble to close their position, which could make the crash even hard.
For example, the GameStop stock rally, which is seen as retail traders fight against hedge fund, but many retail traders also lost millions from their position.
Another uncertainty comes from the regulations. The central banks in many African countries have started to take notice of the increased amount of cryptocurrency transactions and the potential risks these could create for the economies. Some crypto investors have even reported freezing of their bank accounts.
Some central banks like in Nigeria have outright banned cryptos & issued warning against it. The reason cited by government for ban on cryptos was that cryptocurrencies are being used to fund illegal activities and it highly possible that such large volumes might be more harmful than do good.
Also, recently the trading apps that allow investing in foreign stocks have run into trouble with the SEC in Nigeria which has issued warning to investors trading in foreign stocks.
The warning comes in light of regulations and licenses that is needed to offer services that allow Nigerian investors to trade in international stocks. Generally, a broker needs to be authorized by the Nigerian regulatory authorities before it can offer services to the public.
If a broker doesn’t have the right license that allows them to offer trading in allowed securities, then they will not be able to offer services to Nigerian traders. SEC clamped down on investment platforms like Chaka, Bamboo, Trove & warned them to stop offering unregulated foreign securities to Nigerian investors.
This warning has led to two different point of views, the first one being that traders will now focus on stocks listed on the NSE and this will help build the economy. The second one being that investors will choose unregulated international brokers and still continue to trade international stocks. This could drive investors away and might hamper the economy, and increase risk for investors.
Another risk is rise in Investment scams that target general public. Given the interest around financial markets, many people want to join in on the act. Since people are desperate for making a livelihood, Ponzi Schemes have been an effective in luring people by promising to double their money in no time.
A good example of a Ponzi Scheme is the MMM where millions of the people in Africa lost their money. There is little protection against such scams when there is a loss of money by general public, and there might be no recovery for the investors.
This is why general public needs to be educated & warned by regulators in the countries on how to evaluate all investment opportunities, its risks, legality, before actually making an investment. It’s so easy to lose your money these days to scams which is why you need to be extra careful.
