A trading account is similar to an investment account but the securities are bought and sold in a short time period.
Traders require a trading account to buy and sell securities frequently in trading sessions. Due to frequent trades of securities, the regulations, leverage, and other conditions differ slightly from the long-term investment account.
A trading account will allow individuals in Nigeria to trade with their preferred instrument. These accounts are offered by the brokers who act as an intermediary between exchange and clients.
Each broker can offer different instruments, trading account types, features, conditions and charge different fees for the same. This article covers everything you need to know about trading accounts in Nigeria.
Why do you need a trading account?
Why can’t you trade with your investment account? It is a common query among beginners. You can also buy and sell securities on regular basis from your investment account. Nevertheless, it won’t be much cost-effective.
Buying and selling from investment account generally include higher brokerage or commission that is incurred on each executed order. In trading accounts, the fees incurred on executing orders are comparatively lesser and the orders are processed instantly.
Trading accounts can be used to trade multiple types of securities including stocks, commodities, derivatives, currency pairs, cryptocurrencies, CFDs, etc. Some brokers allow trading through multiple asset classes with a single account.
Trading service providers allow individuals to open bigger positions with smaller deposit amounts through leverage.
Some brokers offer leverage ratios ranging from 1:2 to 1:1000 depending on the trading instrument. This makes it feasible to book higher profits from the instruments showing small price fluctuations.
However, this also increases the risk factor as losses can wipe out the whole amount in the trading account.
How does a trading account works?
A trading account acts as a means to connect the traders with the brokers. The account has all the details of income, bank accounts, and the identity of the traders.
Clients can directly place an order through their online trading account which gets processed by the broker. Buy as well as short sell orders can be placed through the trading accounts depending on the trading instrument& asset class.
The broker advances the trade order to the exchange or matches the clients with opposite orders. If the trading service provider is a market maker, then it can take the opposite position itself to execute the order.
The method of processing the order also depends on the trading instrument dealt with by the client.
Trading orders of stocks are processed through a central exchange like NGX where all the publicly traded equities are listed. The forex, CFDs and other instruments trade orders can be matched between clients or between trader and market maker.
Traders need to fund their trading account by depositing through accepted methods. This amount stays in the trading account if no trades orders are made.
Whenever a trade order is executed, the corresponding amount of the trade will be deducted from the account balance. If there is a profit after the closure of opened position, the account balance will be increased by the profit amount.
The account balance will be deducted in case of loss in a trade. The account balance can be withdrawn to the bank accounts through the available methods at the broker.
What are the documents required for opening a trading account in Nigeria?
Trading accounts can be opened online as well as offline in Nigeria. The offline trading account opening requires the clients to physically present the documents required at the broker’s address.
The online trading account opening is a much convenient alternative as all the required documents can be submitted online.
Following are the documents required to open a trading account in Nigeria:
- Identity Proof: Individuals living in Nigeria require a copy of valid proof of identification. This can be an identity document issued by the government with a unique identification number. Identity proofs issued by the government of Nigeria include passport, driver’s license, or national ID card.
- Address Proof: Clients residing in Nigeria will need a copy of address proof to open their offline or online trading account. The utility bills (electricity, water) of the last three months can be used as address proof.
- Photographs: Passport-sized photographs are mandatory to open a stock trading account. Its requirement depends on the broker’s conditions for other capital markets. Stock traders will need to submit 2 passport-sized photographs to open their online as well as an offline trading account. It is not mandatory for all brokers in Nigeria.
- Proof of Income: Some brokers in Nigeria might require proof of income before opening the account or during the withdrawal process. This is not mandatory for all brokers in Nigeria.
Traders must inquire the concerned regulated broker for the requirement of documents. The method of submitting these documents can also be different. Documents can be sent via mail, uploaded online, or sent physically to the address of the broker.
How to open a trading account in Nigeria?
The account opening procedure can be different for each broker or market maker. The online account opening procedure is much faster and convenient as clients do not need to go anywhere. Some brokers may require a physical copy of documents to open the trading accounts.
Following are the steps involved in opening a trading account in Nigeria:
Step 1: Comparison and selection
There are a large number of brokers and market makers available in Nigeria that offer trading services. Some of them are legitimate while some are also fake.
The first step for any individual in Nigeria is to check and compare the regulations, fees, available instruments, deposit & withdrawal methods, minimum deposit, customer support, etc.
For ex. For trading CFDs & forex, one should select top-tier online forex brokers in Nigeria that are licensed by foreign regulators like FCA, FSCA or ASIC as there are no locally regulated CFD brokers in Nigeria.
Traders’trading forex open their account withforeign regulated CFD brokers. Hence for your safety, you should compare the broker’s regulatory licenses, fees, accounts, and read their reviews.
Clients must ensure the chosen broker is well regulated and also check reviews by the existing clients and experts. Each condition of the broker that can affect the trading experience needs to be checked and compared thoroughly.
Step 2: Basic details
For opening an online or offline stock trading account, a Central Securities Clearing System (CSCS) account opening form needs to be filled by the client and submitted to the broker. This form provides the details of the trader to the exchange.
After the CSCS form, another form needs to be filled which provides the basic details of clients to the broker. For trading accounts of other asset classes, the basic details of the client and bank details are to be filled online on their respective websites.
Step 3: Document submission
Offline trading accounts require traders to physically deposit a copy of required documents to the broker. Document submission in online trading account opening can be done online. A scanned copy of the required documents needs to be submitted to the concerned broker.
Step 4: KYC verification
After all the required documents are submitted, the details are cross-checked and verified for authenticity. This process is called KYC verification and can take 1 to 5 working days deferring from broker to broker.
Step 5: Funding the account
After the verification is complete, you will be notified by the broker for confirmation. You will now be required to deposit into the account to begin trading.
The minimum deposit amount and initial deposit amount are different for each broker. Traders must check the minimum deposit requirement and fund their account with equal to or more than the same.
They should also check the fees and time taken for each deposit method to reflect the balance in the trading account.
Step 6: Execute trade orders
Once the deposit amount is available in the trading account, trade orders can be placed.
Some brokers also allow traders to choose the leverage ratio for their trading account. Buy as well as sell orders can be placed as desired by the trader. It is important to understand the functioning of the capital market and all the features available to enhance the trading experience.
What are the risks of online trading?
Trading can allow interested individuals to make an extra income if things go right. However, if the prices move opposite to anticipation, traders can face losses up to a severe extent.
Trading involves a risk that must be understood by every individual planning to open a trading account.
All the costs associated with trading accounts must be well understood before opening the account. Some brokers charge account opening fees and inactivity fees if no trades are executed for a certain period. Hence, clients can also lose deposited amounts without executing trade orders.
Each trading instrument has different risk factors that must be understood by the traders. It is always advisable to start trading with a demo account to check suitability and test the strategies with virtual currency before trading with real money.