If you’re a Ugandan, you’ve 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 along with a cousin in a company that I understand is one of the leaders in Forex trading. While in Uganda recently (May), I even visited their offices and saw a large array of graphics-heavy computers and a TV on Bloomberg TV or other commercial channel. (However, the analysts didn’t seem as busy as I would have expected from watching a lot of “Wall Street” movies.)
Anyway, I returned 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 Mrs. warned me not to put in that company. For the second time they missed my monthly payments, which are 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 stated 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 the foreign exchange markets in the country.
“It’s not a regulated business. It’s really outside of our regulatory provision when it comes to the Forex market,” 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 appears 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, since almost nothing seems to be effectively regulated anyway. In Uganda, it would seem that many regulations remain on paper and the head of the Bank of Uganda (BOU) was perhaps just being realistic because in Uganda, it is a “dog eat dog” world.
2. Experience/reputation of traders
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 such as HSBC, which will tell you clearly 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 with other similar funds, as well as the history of that fund. particular. investment of that particular fund manager.
3. High initial 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 in order to get a decent return, they 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 brokerage accounts, you will find that you can easily buy and sell.
2. Good profitability in the stock market and investments. I’m not sure if there is any other business model out there that provides better liquid returns, especially right now with challenging global markets. Of the various investment manager websites I have researched, it is not uncommon to find those that typically give returns of 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 post 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 run Like many investment products like stocks and other securities, if you have a managed account then you have a broker run the business for you. Yes they do charge fees (check their fees and compare them to others) but this means you don’t have to constantly monitor the position as brokers do this and will usually send you portfolio statements or you can even view them online and as such you can choose to settle if you wish.
SUMMARY AND THE 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 shs 11,278,400
* The return on capital (years to recover capital or A/B) is 2.48 years
Now the basics that you must have well before investing.
* 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 win or a loss.
FINAL WORD, YES OR NO?
In today’s world of unpredictability in the stock markets, this seems to be working fine regardless of how the market performs, but do your research and unless you’re willing to learn how to be a Forex trader (for example, in this site) you should strongly consider placing your Forex investment through a reputable 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 various scams out there and I don’t think it is worth investing a significant amount of money into someone who has not been tested and has no quality control mechanisms to protect your money, for example from dishonest traders or just inexperienced people.
