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Johannesburg - A number of local and international firms are now offering relatively low-cost opportunities for punters to trade in foreign currency (forex) around the clock.
While these "bucket shops", as they are sometimes termed, may promise easy returns, there are big risks involved.
"Foreign currency is one of the toughest markets to trade and I have seen grown, men who are professional traders for the banks, emotionally break down when trades have not gone their way," said a senior Standard Bank forex trader at a recent information session for journalists.
He said most traders were ill-suited to the big stakes and high stress involved in trading currencies.
However, trading in forex - now a $4 trillion-a-day market - is increasingly popular and outpacing the equity market, which looks staid by comparison.
The most popular currencies traded are the US dollar, pound sterling, Japanese yen, the euro, the Australian dollar and the rand - one of the most liquid currencies in the world.
The majority of the online trading offerings are based on spread trading or spread betting models. Traders take positions on currencies (up to four decimal places) and will profit or lose.
Currency traders will therefore be looking at making a profit from the currency moving from R7.4800 to R7.4801, for example.
The potential for big profits and losses in such liquid markets is obvious.
For those with less appetite for such volatility and risk, Standard Bank has recently introduced currency reference warrants which allow traders to participate in rand/dollar currency trading.
There are a number of companies offering forex trading options in South Africa.
Many do not have a geographical presence here.
Xforex, for example, has its headquarters in the British Virgin Islands. And if you dial its call centre, the operator will inform you that it is situated in Greece.
Importantly, this means the company will not fall under the jurisdiction of any local regulatory authorities.
Once a South African client has deposited their funds into an offshore bank account, they have little or no recourse should the firm fail to honour trades, refund money or meet market-making obligations.
In contrast, the products and services of firms with a physical presence in South Africa fall under the ambit of the Financial Services Board (FSB) and associated regulatory bodies.
There are a few other issues to keep top of mind before leaping into the arcane world of foreign exchange trading.
Firstly, carrying a credit card logo - such as Mastercard, Visa or Diners Club - is no symbol that the enterprise is legitimate. It simply means it has the ability to process transactions against these credit cards.
Secondly, one needs to make sure money invested with the trader is stored under one's personal name in a segregated trust account, and not under the name of the trader. If the trader goes out of business, you as the investor wouldn't then lose your money.
In 2008, the local broker Dealstream failed to segregate accounts and client funds were used to manage the positions in the proprietary trading books, Many clients lost all the money they had invested with the firm.
Lastly - remember that many of these firms offer attractive incentive bonuses to sign up to their offerings and employ hard-selling sales people who will encourage clients to part with funds, often transacting via credit card.
The buyer should beware.
- Fin24.com
