What’s behind the boom in online trading?

Millions of people around the world are on the hunt for a new source of income.
The huge spike in volatility earlier this year has attracted many newcomers to online trading. Image: Jim Young/Bloomberg

There’s a boom in online trading, spurred by the worldwide Covid lockdowns. Many of the traders are young and relatively inexperienced, but there’s no question that millions of newcomers to online trading are looking for a new way to make a living.

Trading volumes are up more than 30% since March, according to some accounts.

The trigger for this growth was worldwide fear of a loss of income brought about by Covid-related job losses.

So-called Robinhood investors saw an opportunity to profit from the one-third drop in S&P 500 index prices between February and March. The entry of so many newcomers looking to speculate on stock price movements has changed the dynamics of markets. Stock prices rebounded almost as rapidly as they had fallen, creating opportunities for massive profits.

Microsoft is up nearly 60% since the start of the Covid crash in March, Amazon is up 90%, while Apple is up more than 100%.

Those who bought in at the bottom of the Covid crash have made fortunes.

What’s attracted many newcomers to online trading is the huge spike in volatility earlier this year. Volatility is the friend of online traders, since it presents them with an opportunity for bigger profits (or, indeed, losses).

Looking for ways to generate income

“When money is harder to come by people look for alternative ways to make an income, and that explains the rush into online trading,” says Daniel Kibel, CEO of CM Trading.

“Due to self-isolation through forced lockdowns and major lay-offs across many industries, people found themselves house-bound with limited options to try and generate an income or at the very least keep themselves mentally stimulated. Many turned to online trading.

“It takes perhaps R1 million to start a business, while trading allows you to start with $250 [R4 100]. People need more money and need to do something. Online trading is growing in popularity in Africa as huge numbers of people become aware of it.”

Kibel says while it’s been relatively easy for many to make money in a rising market, it becomes more tricky when markets change direction.

“This is why we emphasise education, with plenty of training material on our website, as well as daily market reports that are designed to help our traders stay on the right side of the market.”

Research shows that better-informed traders who stick to a trading plan – such as exiting a trade at a predetermined profit or loss level – tend to have greater longevity in the markets. This is especially true when positions are leveraged (effectively, multiplying the gains or losses with borrowed money).

The European Securities and Markets Authority (Esma) requires European-registered brokers to disclose how many of their clients lose money. A survey of 30 brokers by the Finance Magnates Intelligence Department found that an average of 76% of clients lose money. That means only roughly a quarter are winning. The best broker had 35% of its clients in the win column, largely due to a tool that allows clients to follow trade suggestions.

CM Trading is on online derivative brokerage offering numerous trading products, such as forex, commodities, indices, cryptos and the ability to purchase individual stocks such as Amazon, Apple, Alphabet and Microsoft.

Kibel has a few tips for new entrants to the market:

  • Educate yourself in the nature of markets, and avail yourself of the training tools at CM Trading’s website;
  • Stick to a trading plan and don’t change your own rules because things are going against you (in other words, exit at your pre-set profit or loss levels);
  • Pay attention to market reports put out by CM Trading’s resident analyst Fred Razak, who has developed a huge online following;
  • Make sure you are trading through a regulated broker – CM Trading is regulated by the Financial Sector Conduct Authority (FSCA);
  • Don’t trade recklessly – invest with money you are prepared to lose, and then only take positions with a small percentage of your trading account; and
  • Take a long-term view when it comes to trading. That will prevent you from taking unnecessary risks so that you will still be around to trade in three or five years.

View CM Trading’s Black Friday special here.

Brought to you by CM Trading.

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