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Nelisiwe Masango, Financial Markets Analyst and CEO of Ubuntu Invest, looks at offshore investment and offers advice to new investors. Masango maintains that investing offshore and exposing your portfolio to different markets creates a valuable sense of diversity – and you don’t need hundreds of thousands of Rands to get started.
“American economist, author and Sterling Professor of Economics at Yale University, Robert J Shiller, once said: “The future is always coming up with surprises for us, and the best way to insulate yourself from these surprises is to diversify.”
“You may feel you’ve found the next big thing in your investment portfolio, but there is always more security in diversity. Investing offshore exposes your investment to more opportunities, so all your eggs aren’t in one big, high-risk basket,” adds Masango.
“Possibly the easiest way for a novice investor to gain exposure in foreign markets is through futures trading. Futures trading fits under the umbrella of the derivatives market, which encompasses a few different types of investors, trading in futures, options, forwards or swaps. For the purpose of this article, though, let’s just look at futures for beginners.
“Simply put, futures trading is a sales agreement between two parties. One party agrees to buy a commodity by a certain date. The party selling the commodity then agrees to provide it at a set cost – no matter what the future market price may be. For example, a retailer could lock in a set price on a mielie crop from a farmer,” Masango says.
“The agreement could work in favour of either the buyer or the seller, depending on whether the price of mielies goes up or down. And in the case of volatile commodities like Bitcoin or fuel, for example, there is the potential for a futures trader to either make a very large profit or a substantial loss.”
Beyond our shores
“Being based in sunny South Africa doesn’t prevent you from enjoying the spoils of the US tech boom,” Masango advises.
“Apple and Tesla shares are great examples of tech giants that investors have historically cashed in on. The ever-growing Asian market is also worth exploring. And a promising place to start is to take a position in the Nikkei or Hang Seng indices. With CFDs (Contract for Differences), there are no limits to how much you can benefit from offshore investments, because you don’t have to buy a huge number of shares outright.”
Smaller investment with the potential to make more
CFDs are all about minimising your initial capital outlay and learning how different markets work. Marry these two concepts and, once you have the balance right, you are primed to take advantage of international market exposure without spending a fortune.
In brief, A CFD allows a trader to make a profit from price movement – but without actually owning the assets they’re trading. Here’s how:
- A CFD is a formal contract between a buyer and a seller.
- The contract stipulates that the buyer must pay the seller the difference between the current value of an asset and its value when the contract ends if the value drops.
- If the value goes up, the seller pays the buyer the difference.
- CFD trading must be conducted through a reputable broker.
Here’s an example:
If you bought 20 000 shares that are currently valued at R3 each, you would pay R60 000 and a broker commission. But if you buy a CFD as opposed to purchasing the shares outright, your broker could offer you a CFD at a proposed margin of, say, 10%.
That way, you expose your portfolio to the same 20 000 shares at just 10% of the cost. So, rather than having to pay R60 000, you pay R6 000. If the share price goes up – for example, by 10c – you would then be entitled to a profit of around R2 000 because of your 10% agreement with your broker – i.e., 10c x 20 000 is R2 000. Bear in mind, you would have to pay broker fees from that profit. Percentagewise, the profit is potentially far bigger and the risk far smaller for a CFD trader than it is for someone who buys the stock outright.
“The CFD trader exits the trade with a profit of approximately 33.3% on their R6 000 investment, whereas the full-price buyer exits with only 3.33% on their R60 000 investment. So, rather than laying out extensive capital on one commodity, with a CFD, the smaller investment means you can potentially expose your portfolio to a larger collection of diversified trades for a less risky mix of profit and/or loss,” Masango explains.
It’s important to remember that, with CFDs, you will be taxed locally on any profit you make, regardless of the market or country they’re exposed to. And it’s up to you to declare your trading and investment activities with SARS.
Stay in the know
The greatest way to empower yourself to maximise your success is financial literacy. Google, market news and expert commentary can be great tools to start understanding how the markets work.
“At Ubuntu Invest, we also offer a free education centre to help aspiring traders learn how to identify opportunities in the various markets, including cryptocurrencies, the stock market and commodities. There are also resources like daily market updates and signals that will make investing easier,” says Masango.
“Don’t let fear hold you back when you explore trading in the markets. Staying informed can be your greatest protection from failure. We live in a time when you can learn and manage investing in the palm of your hand.
“There is no need to leap in and invest every spare cent you have. Caution is always a good place to begin. Start small and minimise your risk while you get more comfortable. Trading has become so much more accessible and is far less daunting than the old days of busy stock exchanges and frantic brokers shouting out instructions.”
It can be as simple as starting the process by investing online or by downloading an Android or iOS app. The markets are at your fingertips. Today’s cutting-edge technology allows you to open a new account, upload your FICA/KYC documents and start investing offshore immediately. We are in a bold new era, filled with opportunity and you can’t succeed if you don’t try.
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