The benefits of offshore versus local securities trading

It’s not as complicated as you might think.
Image: Michael Nagle/Bloomberg

Take a look at the graph below to get an idea of why South Africans can’t get enough of offshore stocks.

The blue line is the S&P 500 index in US dollars and the red is the JSE Top 40 index, also measured in US dollars.

The difference in returns over 10 years is huge: 360% for the S&P 500 and about 40% for the JSE Top 40.

“There are a lot of good reasons to trade offshore securities, in addition to local ones,” says Shaun Murison, senior market analyst at IG Markets SA.

“If you limit yourself to JSE stocks, there are only about 40 or 50 that are highly liquid, whereas if you have an offshore account, the possibilities are endless.

“You have stocks, bonds, forex, commodities, indices in multiple markets across multiple geographies. Quite apart from that, when you trade offshore there are certain sectors you can invest in that are not well represented on the JSE, such as energy, hospitality and transport.”

S&P 500 versus Top 40 in US dollars

Source: Morningstar

“If you open an account with IG Markets, we open two accounts by default – a local and an offshore one,” says Murison.

“If you want to trade offshore, you choose the base currency, such as US dollar, euro or sterling, by way of example.

“The beauty of doing this is you can use a local credit or debit card, paying in rands, to fund an international account,” he adds.

“This would form part of your R1 million-a-year single discretionary allowance, which is what all South Africans are allowed to ship abroad each year, without any approvals required.”

The differences between local and offshore accounts

IG Markets allows clients to trade contracts for difference (CFDs) which are a type of derivative that gives you exposure to an underlying security.

For example, if you bought Anglo American on IG Markets, your trading account will reflect the underlying price movements in the actual stock, without owning the stock itself. You are also able to leverage your trading position, meaning you can magnify the underlying price movement up to five times the spot market price.

“This, of course, has dangers, and people should use leverage wisely,” says Murison.

“Just as your gains are magnified, so are your losses. This is why we spend a lot of time and have created a suite of tools to assist traders in understanding the risks. We have done a great deal of analysis of our most successful traders and they are the ones who execute stop-losses and take-profit levels and stick to a trading plan. We encourage our clients to spend a lot of time studying the educational material on our website and keep up to date on market developments through our regular webinars, news and alerts.”

Another benefit to trading offshore markets is that a large and expanding list of international stocks offer extended trading hours. These include the larger stocks such as Apple, Microsoft and Alphabet. This means you are no longer confined to short trading windows, as is the case on the JSE and with most equity markets around the world.

Yet another benefit of going offshore: trading fees are lower.

“International indices have lower spreads due to increased liquidity. If you are a day trader or a high frequency trader, this makes a huge impact on your bottom line over time,” says Murison.

“People in SA are quite comfortable trading the local market, but sometimes you need to leave your comfort zone and go offshore. When we analyse our most successful traders, a high proportion of them trade both the local and offshore markets.”

Day traders make up a relatively small portion of IG Markets’ clients. A far larger proportion are what are called ‘swing traders’, who remain in trades for one or more days to profit from price changes or swings.

Further segmenting the IG Markets client base, there is a high proportion of clients trading the forex markets or engaged in high-frequency trading using computerised trading systems, says Murison.

A wide range of securities and indices to trade

IG Markets also offers its professional clients a cryptocurrency index called the Crypto 10 index, which is an index built around the 10 largest cryptocurrencies as weighted by market cap. Apart from this, clients can also get leveraged CFD exposure to Bitcoin and Ethereum.

Some of the other benefits of trading the offshore markets include the range of stocks and indices available:

  • The Crypto 10 index (comprising the top 10 cryptos ranked by market cap).
  • The FAANG index (an index made up of Facebook, Apple, Amazon, Netflix and Google). This index is up 26% over the last year, assisted by a global shift to online consumption and engagement.
  • The Cannabis index (made up of the 20 largest publicly quoted US and Canadian cannabis companies). It’s been a tough year for cannabis stocks, which are likely to end the year lower than they started it. Cannabis is legal in Canada for medicinal and recreational use, but in the US the law varies by states, with some states having no legislation at all.

Demo account

Murison advises those interested in starting online trading to open a demo account, and to study up on the educational material on the IG Markets website and experiment with various trading styles and strategies. When you’re ready to go, you can fund your account and start live trading.

About IG Markets South Africa:  IG Markets South Africa was established in 2010 and is regulated by the Financial Sector Conduct Authority (in South Africa) as an over-the-counter derivative provider and an authorised financial services provider (FSP No 41393). It has an office in Sandton to service its thousands of South African clients. Its board and senior management in South Africa consist of largely South Africans making it a truly South African operation. As one of the biggest employers in the online broking category, it is proud to be playing a leading role in the growing financial services industry in South Africa

Note that CFD losses can exceed your deposits.

IG Markets is part of the LSE-listed IG Group, which has a market cap of £3.4 billion (R71.4 billion). It has more than 330 000 active clients worldwide.

Brought to you by IG Markets South Africa.

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.

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