How safe is online shares trading?

When Tesla first launched its model three, you could either buy the car or the company’s stock. Those who bought the car are watching it depreciate while those who opted for the stock can buy 10 model three’s because share prices have gone up over tenfold.

Mr Kenneth Waiganjo, chief executive Scope Markets tells the running joke from his fourth floor glass office at Westside Towers building along Lower Kabete Road in Nairobi’s Westlands area.

He says the world has evolved so much that you do not have to be in America to buy a Tesla share, sitting in front of your computer, his company can give you an account where you can trade on stocks all the way in the USA.

And not just Tesla, they can offer you stocks, currencies, commodities and metals such as gold online or even complex products including derivatives, sorting things you may only read about in Wall Street Journal or watch in movies.

The growth of internet connectivity has opened up new spaces for investments globally.

This would be every investors’ dream given that currently less than 10 stocks are actively trading on the Nairobi Securities Exchange, fixed income such as T-bills are stuck sub-10 percent and corporate bonds have only three issuers with two of them frozen compared to 28 listings in 2014.

But there is a caveat to it, some Kenyan investors who sent their money to offshore accounts of brokers have failed to get the proceeds back when they want to cash out.

Most common fraud

“Many Kenyans used to open accounts with the online unregulated players, trade and make money then withdraw and wait, but the money never came,” Mr Waiganjo said.

When the Capital Markets Authority appeared in parliament to shed light on famous con games, they said they were investigating 500 cases for losses over Sh1 billion invested in unregulated products including online forex frauds, illegally pooled funds, crypto currency, real-estate and ponzi schemes.

Authority chief executive Wyckliffe Shamiah told the National Assembly Finance Committee the most common fraud were online forex schemes where unregulated firms pose as brokers and collect money from the public for buying currencies online.

The markets watchdog has cracked down on 40 online forex traders operating without a license and fingered a few including Iforex time, Trends Forex Traders, AutoTrade Markets, Everjoy Forex Institute, Interweb Global Fortune and Thika Forex Trading Lounge. The authority said it has ordered refunds from those caught and instituted criminal charges.

“The authority established that Mr Charles Kibue Mwaura operates from Nakuru where he collects funds of between Sh5,000 and Sh20,000 from clients and promises them a daily return of 10 per cent from the day the money is invested,” the CMA boss said.

For those operating abroad, the regulator does not block their sites but notifies advertisers not to market their products and payment service providers not to accept to be used as conduits to send money abroad.

CMA has also issued a joint notice with the Central Bank of Kenya warning Kenyans from dealing with unlicensed online money traders as digital tools make it difficult to catch the firms most of which operate from foreign countries.

The challenge has been getting a trusted broker who investors can physically locate and report to the regulator if they get cheated.

CMA has licensed four non-dealing online foreign exchange brokers namely; EGM Securities Ltd (trading as FXPesa), SCFM Ltd (trading as Scope Markets), Pepperstone Markets Kenya Limited, and Exinity Capital East Africa Limited.

Mr Waiganjo says unlike foreign based players those registered to operate in Kenya have physical offices and a flexible way to withdraw client cash. They also operate in line with Central Bank rules on know your customer to avoid money laundering.

Mr Waganjo also says their platforms are not for retail investors but for sophisticated players who can understand the risk they are taking and they are not even allowed to advertise.

They instead offer trainings which were initially physical but have since moved to online webinars and seminars.

Retail investors are given a dummy account to learn how to trade after attending trainings but most of their clients are brokers who are looking for market access.

Offers high returns

“This is not poker, it depends on how much experience you have, the right information and understanding of the offshore markets and training is important,” Mr Waiganjo said.

“Passive investors are better off working with a money manager or a licensed broker like SIB, Mansa x fund,” he said.

SIB money market fund with over Sh3.1 billion assets by the end of 2020 invests in online foreign exchange and offshore commodities. It was licensed in December 2018 and is an offshoot of SIB Investment Bank which has been in operation for 25 years.

The fund which was offering up to 24 percent returns received sceptic online reviews over its huge returns claiming it is suspect and risky without visible assets. The firm said while online forex offers high returns, it is usually a very risky business with possibility of making huge losses.

SIB fund says it has leveraged forex with commodities, precious metals, cash and hedged with derivatives as a diversified strategy to ensure loses are minimized.

Despite these partnerships, some local brokers are protesting that it is easier to open an account with the online forex players who are agents of foreign owners with links to offshore markets than with a local player pushing them out of business.

“I opened an account with them and it was so simple their know your customer, is so easy and straightforward whereas we have documents upon documents which slow us down and give them an advantage. I guess they rely on the KYC models used by their parent firms so maybe the regulator should consider making ours also easier,” a broker who requested anonymity said.

[email protected]