Take a look at the chart below to get an idea of why South Africans can’t get enough of offshore stocks.
The blue line is the S&P 500 index in US dollars and the red is the JSE Top 40 index, also measured in US dollars.
The difference in 10-year returns is huge: 360% for the S&P 500 and around 40% for the JSE Top 40.
“There are many good reasons to trade offshore securities, in addition to local securities,” says Shaun Murison, senior market analyst at IG Markets SA.
“If you limit yourself to JSE stocks, there are only about 40 or 50 that are very liquid, whereas if you have an offshore account, the possibilities are endless.
“You have stocks, bonds, currencies, commodities, indices in multiple markets in multiple geographies. Regardless of that, when you’re trading overseas, there are certain sectors you can invest in that don’t are not well represented on the JSE, such as energy, hotels and transport.
S&P 500 vs. Top 40 in US Dollars
“If you open an account with IG Markets, we open two accounts by default – one local and one offshore,” says Murison.
“If you want to trade overseas, you choose the base currency, like the US dollar, the euro or the pound sterling, as an example.
“The beauty of doing this is that you can use a local credit or debit card, paying in rand, to fund an international account,” he adds.
“It would be part of your one-time discretionary allocation of R1 million per year, which all South Africans are allowed to ship overseas every year, with no approval required.”
The differences between local and offshore accounts
IG Markets allows clients to trade contracts for difference (CFDs), which are a type of derivative product that gives you exposure to an underlying security.
For example, if you bought Anglo American on IG Markets, your trading account will reflect the underlying price movements of the real stock, without owning the stock itself. You can also leverage your trading position, meaning you can amplify the underlying price movement up to five times the spot market price.
“This, of course, has its dangers, and people should use leverage wisely,” Murison says.
“Just as your wins are magnified, so are your losses. That’s why we spend a lot of time and have created a suite of tools to help traders understand the risks. We have done a lot of analysis of our top performing traders and they are the ones who execute stop-loss and take-profit levels and stick to a trading plan. We encourage our customers to spend plenty of time studying the educational material on our website and to keep up to date with market developments through our regular webinars, news and alerts. »
Another advantage of trading on the offshore markets is that a large and growing list of international stocks offers extended trading hours. These include the largest stocks such as Apple, Microsoft and Alphabet. This means that you are no longer confined to short trading windows, as is the case on the JSE and most stock exchanges around the world.
Yet another advantage of offshore: trading costs are lower.
“International indices have lower spreads due to increased liquidity. If you’re a day trader or a high-frequency trader, that has a huge impact on your bottom line over time,” says Murison.
“People in South Africa are quite comfortable trading in the local market, but sometimes you have to leave your comfort zone and go overseas. When we analyze our top performing traders, a high proportion of them trade in both local and offshore markets.
Day traders make up a relatively small portion of IG Markets clients. A much larger proportion are so-called ‘swing traders’, who stay in trades for one or more days to profit from price changes or fluctuations.
Further segmenting IG Markets’ customer base, there is a high proportion of customers who trade in foreign exchange markets or engage in high-frequency trading using computerized trading systems, Murison explains.
A wide range of stocks and indices to trade
IG Markets also offers its professional clients a cryptocurrency index called the Crypto 10 Index, which is an index built around the 10 largest cryptocurrencies weighted by market capitalization. Apart from this, clients can also get leveraged CFD exposure to Bitcoin and Ethereum.
Some of the other advantages of trading in the offshore markets include the range of stocks and indices available:
- The Crypto 10 Index (comprising the top 10 cryptos ranked by market cap).
- The FAANG index (an index composed of Facebook, Apple, Amazon, Netflix and Google). This index has increased by 26% compared to last year, thanks to a global shift towards online consumption and engagement.
- The Cannabis Index (composed of the 20 largest publicly traded US and Canadian cannabis companies). It’s been a tough year for cannabis stocks, which are expected to end the year lower than they started. Cannabis is legal in Canada for medical and recreational use, but in the United States the law varies by state, with some states having no laws at all.
Murison advises those interested in online trading to open a demo account, study the educational materials on the IG Markets website, and experiment with various trading styles and strategies. When you’re ready to go, you can fund your account and start live trading.
About IG Markets South Africa: IG Markets South Africa was established in 2010 and is regulated by the Financial Sector Conduct Authority (in South Africa) as an OTC derivatives provider and authorized financial services provider (FSP No. 41393). It has an office in Sandton to serve its thousands of South African customers. Its board of directors and senior management in South Africa are largely made up of South Africans, making it a truly South African operation. As one of the largest employers in the online brokerage category, it is proud to play a leading role in South Africa’s growing financial services industry.
Brought to you by IG Markets South Africa.
Note that losses on CFDs can exceed your deposits.
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