On August 29, 2023, the Nigerian Exchange Limited (NGX) witnessed the All-Share Index (ASI) reach a new peak of 66,490.34 points. This event marked a historic moment, surpassing the previous record of 66,371.20 points set on March 5, 2008. Rising by 0.51% in only one day, the ASI properly reflects the market’s current bullish sentiment.
This achievement allows Nigerian investors to explore indices trading within the vibrant market. Indices trading involves speculating on the price movements of market indices, which represent a basket of selected stocks from a specific market segment. The ASI is a prominent example, reflecting the collective performance of Nigerian companies from banking, telecoms, energy, and more.
This guide is for you if you are a Nigerian investor seeking to make informed financial decisions. Below, we’ll delve into what indices trading is, why it’s a promising avenue, and how it aligns with the Nigerian market.
Understanding the Nigerian market
The new record of the ASI carries profound implications in the online trading market. 2008, when the previous record occurred, was characterised by speculative activities and margin lending in the stock market before the global financial crisis burst this bubble. Over a decade later, Nigerian equities would continue to take significant dips regularly. In March 2020, investors incurred a N370 billion net loss from renewed selloffs after having just rallied a net capital gain of N128 billion the previous day. Closing at 22,000 points was a regular occurrence for the ASI, depressing the average year-to-date return to -17.8%. Only in the latter half of 2020 did the trend shift, and the ASI gained 50.03%.
In 2023, the market is characterised by a weakening currency and soaring inflation, especially as President Bola Tinubu embarks on some of the market’s boldest reforms, including removing some exchange rate restrictions. These have resulted in a rise in domestic investment transactions, totalling an estimated N6.8 trillion ($8.98 billion) from 2020 to July 2023. Crypto usage has also grown 9% year-over-year to $56.7 billion (around N43.6 trillion) between July 2022 and June 2023 as people continue to search for opportunities to hedge against the devaluation of the naira. Indices trading thus presents itself as one of these other opportunities with the potential to protect from market volatility.
Considering indices trading
Every trade is a gamble on future market movements. However, there will always be key ways to manage risk. These strategies can be reactive, maximising the stop loss, cutting losses swiftly, or proactive, embracing diversification.
Indices trading is an excellent way for Nigerian investors to diversify their portfolios. Nigeria’s economy is subject to various local factors and challenges, and investing in multiple indices representing different regions and sectors can shield investors from the impact of local market fluctuations.
Domestic indices like the ASI can offer insights into Nigerian companies’ and sectors’ performance and health. This provides a unique advantage to Nigerian investors, who can use this information to make informed decisions about their investments within the country. Meanwhile, global indices, less susceptible to a single market’s volatility, serve as a hedge against local economic uncertainties.
Most online trading platforms offer a wide range of global indices to allow investors to allocate capital across various indices. This enables Nigerian investors to trade indices and access international markets without leaving the comfort of their homes. You can quickly participate in global economic trends from the US or the UK, access popular indices like the Dow or Nasdaq, and execute your trades in under 25 ms—thus simplifying your process of building a diversified portfolio.
Additionally, competitive trading platforms allow you to speculate on the price movements of stock indices without buying the underlying asset. This allows Nigerian investors to profit from rising and falling markets by taking short positions. Adaptability is particularly relevant in Nigeria, where market conditions change rapidly. By employing strategies such as short selling, you can capitalise on market downturns and maximise returns within the ever-evolving economic landscape.
Major indices to note
Besides Nigeria’s flagship index, ASI, various other indices are highly relevant to Nigerian investors. Here is a quick run-down of major index that can easily diversify your portfolio.
S&P 500: The Standard & Poor’s 500 Index represents 500 of the largest publicly traded companies in the United States. This includes established tech giants like Apple, Microsoft, and Amazon and companies from various sectors like healthcare, finance, and consumer goods.
FTSE 100: The Financial Times Stock Exchange 100 Index tracks the top 100 companies listed on the London Stock Exchange. These include multinational corporations with global reach, such as BP, Unilever, and HSBC Holdings.
NIKKEI 225: The NIKKEI 225 is Japan’s leading stock market index. It comprises 225 companies listed on the Tokyo Stock Exchange, including renowned corporations like Toyota, Sony, and SoftBank Group.
DAX 30: The Deutscher Aktienindex, which translates to “German stock index” in English, represents the performance of the 30 blue-chip and most liquid publicly traded companies on the Frankfurt Stock Exchange in Germany. Some of the firms included are Volkswagen, Siemens, and Adidas.
CAC 40: CAC stands for “Cotation Assistée en Continu,” or Continuous Assisted Quotation 40. This represents the 40 most significant publicly traded companies on the Euronext Paris, one of Europe’s leading stock exchanges. Examples of listed companies include TotalEnergies and Air Liquide.
Getting started with indices trading
The trading indices of the NGX have been consistently positive in recent months, representing growth in both trading volume and value, alongside an increase in investor sentiment. The anticipation for the release of half-year earnings reports, especially from dividend-paying companies, was palpable as investors traded 1.4 billion shares worth N18.1 billion in 7,179 deals.
Unsurprisingly, indices trading aligns with Nigeria’s aspirations for greater financial integration as the African capital markets seek greater integration. In fact, the African Development Bank and the West African Monetary Institute have already collaborated on capacity-building programs such as the WACMI Phase II Project to encourage trading activity. The Director General of the West African Monetary Institute, Dr Olorunsola Olowofeso, explains that by harmonizing operational rules, providing aggregated financial market information, and offering common market infrastructure, the integration can increase investment opportunities and reduce costs for market participants.
Therefore, there is no better time than today to participate in the market. To start indices trading, choose a trusted online broker with a user-friendly platform. You can begin with a demo account to practice trading without real money and gradually transition to a live trading account. The right online trading platform will guide you in developing a clear trading strategy aligned with updated market news and trends.
Monitor your portfolio continuously, adapt your strategy as needed, and seek more professional advice if necessary. When done right, indices trading can become a pivotal tool for navigating the dynamic landscape of Nigeria’s financial markets.
