If you are Ugandan, you have probably heard all about forex trading and how it seems to be the most popular “new” business in Uganda.
I wanted to invest $10,000 together with a cousin in a company that I understand is one of the leaders in Forex trading. While I was in Uganda recently (May), I even visited their offices and saw a variety of graphics-heavy computers and a television on Bloomberg TV or another commercial channel. (However, analysts didn’t seem as busy as I might have expected from watching a lot of “Wall Street” movies.)
Anyway, I went back to the UK and started saving to invest the minimum required. I recently (November) called a good friend in Uganda and casually mentioned the idea to him. He casually replied, “I just invested $2,500 that the Mrs. warned me not to put into that company. For the second time they defaulted on my monthly payments, which is supposed to be 20.4% interest and principal per month.” He indicated that this company is a ponzi scheme, commonly called a “pyramid” in Uganda.
So is Forex trading the real deal? I presented my observations.
The cons (first of course).
1. Unregulated sector in Uganda
According to an article appearing in the New Vision newspaper:
“….Mr. Stephen Kaboyo, director of financial markets at the Bank of Uganda, also ruled out the deal despite being in charge of foreign exchange markets in the country.
“It’s not a regulated business. It’s really outside of our regulatory provision as far as the Forex market is concerned,” he said in an interview on Friday. “It’s like any other business. If you’re interested, you go in. If you go there and lose your money, you don’t complain.” Source: AllAfrica.com
As an unregulated sector, this creates a risk especially for the cautious investor (as anyone should be!), especially when compared to, for example, Switzerland, which seems to be the center of online trading and has a well-regulated sector.
This, of course, may not be a major problem for a typical Ugandan, as hardly anything seems to be effectively regulated anyway. In Uganda, it would seem that many regulations remain on paper and the director of the Bank of Uganda (BOU) was perhaps just being realistic because in Uganda, it is a “dog eat dog” world.
2. Traders’ experience/reputation
The sector has recently taken off in Uganda and with a large number of ‘traders’, how do you check who is ‘legitimate’ and who is a charlatan? How do you know who has a lot of experience and who doesn’t? This is compared to established players like for example HSBC who will clearly tell you how the sector is performing. At HSBC, if you wanted to invest in Exchange Traded Funds (ETFs), for example, which are financial investment products not dissimilar to Forex trading, you would get an investment profile, a comparison to other similar funds, as well as the history of that fund. particular. investment of that particular fund manager.
3. High starting capital. A good Forex trader or investment broker will usually ask you to have a starting capital of $10,000. This is because forex trading is based on tight spreads (called “pips”), so to get a decent return, you need to invest a good amount of money. At today’s exchange rate (November 2011), $10,000 is about 28 million shs!
And now the professionals
1. Liquidity. The market is huge. Forex trading is the largest type of market in the world and if you open an account, say an FX pro account with oanda.com or other similar self-traded or managed broker accounts, you will find that you can easily buy and sell.
2. Good profitability in the stock market and investments. I am not sure if there is any other business model that provides better liquid returns, especially at this time with challenging global markets. Of the various investment manager websites I have researched, it is not uncommon to find ones that give returns of typically 6%. Compare this to, say, a high-interest savings account with Barclays Uganda or Crane Bank that offers returns of at most 5%.
Of course, you should know that like any stock trading, returns are often not guaranteed and many traders record losses, especially those who trade themselves on trading platforms promoted by so many online Forex trading companies.
3. It can be an easy industry to manage Like many investment products, like stocks and other securities, if you have a managed account, then you have a broker who handles the business for you. Yes they do charge fees (check their fees and compare with others) but this means you don’t have to constantly monitor the position as brokers do this and they will usually send you portfolio statements or you can even view them online and as such you can choose liquidate if you wish.
SUMMARY AND FINAL WORD
first the numbers
Based on my analysis:
* Capital investment (A): Shs 28,000,000
* Income per year: (assuming 3.44% interest per month): Shs 11,558,400
* Profit per year (assuming investment manager fee is 1% of initial capital) (B) is 11,278,400 sh
* Return on capital (years to recover capital or A/B) is 2.48 years
Now the basics you need to get right before you invest.
* A regulated investment manager/broker is essential.
* A foreign currency account to protect yourself from Forex fluctuations.
* Return on investment cannot be guaranteed, especially in the current economic climate. Prepare for a profit or a loss.
FINAL WORD, YES OR NO?
In today’s world of unpredictability in the stock markets, this seems to be working well regardless of how the market performs, but do your research well and unless you’re willing to learn how to be a Forex trader (for example, in this site) you should seriously consider placing your Forex investment through a trusted investment broker/bank who will manage the account for you.
If necessary, open a foreign currency account with one of the Ugandan banks to handle this aspect and deal with a foreign player who is regulated. For example, choose companies that are regulated in the UK by the Financial Services Authority (FSA). There are several scams out there and I don’t think it’s worth investing a significant amount of money on someone who hasn’t been tested and doesn’t have quality control mechanisms in place to protect your money from eg dishonest traders or just inexperienced people.
