Retail trading (especially retail day trading) is making waves in Ghana and is becoming a popular alternative investment. For people unfamiliar with retail day trading, it is when independent traders (as opposed to financial institutions or investment firms) buy and sell securities with very short holding periods in order to profit from price changes. Popularly day traded securities include forex, cryptocurrency, options, futures, stocks and commodities.

As regular readers of CediTalk will know, I have serious doubts about the viability of a retail day trading operation. But don’t let my pessimism be the reason why you do not roll the dice and find out whether your fate is fortune or bankruptcy. Instead, I have compiled five questions which you should honestly answer before you take the dive into day trading.

1. How much capital do you really have? The allure of day trading is usually the fact that brokers will lend you money to trade with, and therefore capital of $1,000.00 can give you access to about $10,000.00 or even $100,000.00 with which you can use to trade. This borrowed money you trade with (known as margin) could either land you huge returns or leave you owing much more than your invested capital if your trade backfires spectacularly. Therefore you need to be sure that you have enough capital to trade on margin that’s large enough for your returns to be meaningful while also being large enough to absorb any major losses you make while trading.
2. Would it generate enough income for you? Day trading is a full-time job. If you day trade and it’s not your full-time job then it means you do not have enough capital in it for it to matter or you’re trading on company time at work. The major advice given to day traders is not to risk more than 2-5% of your capital on a single trade. That means that you need to make many micro-trades in a single day to generate enough returns, and many of those trades will lose money. So in order to net a consistent positive return each month, you need to make a whole lot of trades and be very good at it. Now that leaves you with almost no time to engage in any other income generating activity.
3. How would you deal with unsystematic risk? Unsystematic risk is risk that a particular company or industry will perform poorly. The traditional method of managing unsystematic risk is by diversifying a portfolio so that you are not exposed to only one sector. The problem with day trading is that you put everything, including your personal assets, at risk. Therefore even if you are well-diversified, the fact that a significant trading loss can result in you owing the broker means that you cannot diversify away the risk of day trading. Your personal assets can be sold to defray your liability to the broker. So while a traditional asset comes with a maximum loss of -100%, day trading presents a potential loss of ∞. (For example, a trader with a capital of US$77,000.00 recently found out he owed $9 million to his broker after his broker’s software was unable to process negative oil prices.)
4. Who would you report to if things go wrong? The day trading community has been rocked by many scams which has cost investors lots of money. Sometimes too, extremely wild moves in the market (such as the removal of the Swiss franc peg to the euro in 2015) can wipe out investors and even the brokers. Without the regulations of Ghana’s Securities and Exchange Commission (SEC) or the capital backing of the Bank of Ghana (BoG), how exactly would you get some semblance of justice if your money was lost?
5. Have you exhausted all other options? We are in Ghana where one can earn 14%-16% per year with no risk simply by buying government treasuries. In order to take on the very risky practice of day trading, you should first ensure that none of the much safer investment opportunities in the market fulfills your needs.

If you can comfortably answer these questions then perhaps retail day trading will work for you. But even if that is not your objective, I believe these questions are interesting ones to discuss as we continue our search for the ultimate investment strategy.