DIY Investing: Despite Knowledge, You Could Still Lose Money
DIY investing stands for “do it yourself investing”. This is a type of investing in which the investor does not take any help from investment advisors or financial planners or any other professional.
DIY investing has been gaining in popularity in Nigeria and around the world. This is largely because of the low barrier to entry since anyone can become a DIY investor these days.
There are several online discount brokers operating in the market and they provide an easy way to start trading or investing.
Even though anyone can become a DIY investor, not everyone succeeds. Even though it’s easy to access these platforms, there are several risks.
According to Safe Forex Brokers Nigeria, online DIY investing through online trading apps has become very popular among retail traders in Africa. And these investors mostly trade instruments like forex, commodities & foreign market bonds and shares. But this can be highly risky as most first-time investors are not experienced enough & don’t understand the instruments that they are trading; it is widely reported that more 70% new traders lose money on forex and CFDs.
Here is an overview of DIY investing including how it works and the risks involved.
What is DIY Investing?
Thanks to information available through the internet, a lot of people are doing things themselves without asking for help. The investing space has not been immune to this phenomenon.
DIY investors are planning and executing their own investments without seeking any help from a professional or licensed advisor. DIY investing is also known as self-directed investing.
Rather than using full-service brokerages or professional money managers, DIY investors rely on discount brokerages and investment account platforms.
There has been a huge uptick in the volume of Retail trading at Nigerian Stock Exchange NGX, with almost 40% (494.87 billion NGN) of the Domestic Trading Volume at NGX in 2021 till October 2021 being Retail & 60% Institutional. This is compared to NGN 451.19 billion Domestic Retail volume in complete year of 2020.
A large reason why DIY investing has exploded over the past decade is because a lot of Online Investing Apps have made it very accessible.
Also, people believe that financial professionals are expensive to hire. While these professionals are highly skilled and have a lot of experience, they charge accordingly.
People believe that hiring a professional to manage investing is a rich man’s activity and not meant for the working or middle class. (Even though this is not true, and there are numerous financial advisors who are cost-effective). There are several full-service brokerage firms that offer investment advice almost for free even though they charge slightly higher brokerage rates when compared to discount brokers.
A lot of people believe that managing one’s investments is not difficult. Further, since basic investing knowledge is available on the internet for free, many investors feel that there is no need to hire a professional for something that they can do themselves.
Another reason for DIY investor becoming more popular is because a lot of investors have lost trust in the financial industry. Investors have lost money because of bad advice from professionals, and so they prefer to learn on their own and invest their money.
Lastly, DIY investing offers you complete control over your investments which many investors prefer rather than having someone look over your shoulders.
How Does DIY Investing Work?
Two of the things that have made DIY investing possible and viable have been the growth of discount brokerage firms and the release of numerous investment tools.
A DIY investor will need both of these in order to succeed. Together, these two things have made it easy for an individual investor to manage his investments and also plan their investment strategy. These platforms have also released free personal advice that is interactive in nature for investors to learn from.
A lot of discount brokerages also offer free educational material to their clients (investors).
There are many different ways in which a DIY investor can approach investing. They may rely solely on their own knowledge and internet research and then use a discount brokerage to execute their trades. Or, they may take a hybrid approach that involves external advice of some kind such as copy trading in which investors follow the trades made by more experienced and successful traders.
Discount brokerages largely leave it up to you make whichever trades that you want. However, they do provide a wide range of investment analysis and advice that you can rely on to inform your trades. They also provide expert recommendations and insight.
However, that is the extent of the help that a DIY investor gets. They need to rely on their own judgement to decide which investments are best, how much money they should invest, and when they should enter or exit a trade.
A lot of the online brokerages do not charge any commission on the trades; however, they do charge a spread. If you’re a high-volume trader, then you can also opt for a commission-based model with a much tighter spread.
These brokerages also allow you trade using high leverage, create strategies, and invest directly in mutual funds or individual stocks or other types of instruments. In many of the Online Investing apps, you also have the option of trading forex or investing in an Exchange-traded Fund.
If you only make a few investments or trades a year, then you may consider paying more per trade for better quality investment and research. If you’re a daily intraday trader, then you may consider brokerages that offer a few free trades to their users.
Risks of DIY Investing
There is a lot of risk involved with investing of any kind, and DIY investing is not an exception. Even if you have the required knowledge of investing and how it works and have great judgment, you can still end up losing a lot of money. This is because investing is inherently a risky activity and the markets are impossible to predict in the short-term or even in the long term.
If you’re investing in any market-linked security, then you should be prepared to lose the money you have invested. Do not invest more money than you can afford to lose.
Even though DIY investing is highly accessible and it seems like anyone can do it, it’s actually a very risky activity. Most traders end up losing more money than they make. Some traders even lose all the money in their trading account.
This risk is because DIY investing involves trying to predict the financial markets. The price movements in the financial markets are based on demand and supply (amongst other things), so they can move in any direction at any time.
Further, DIY investing platforms encourage speculative gambling rather than investing. Investing involves making an informed investment decision for the medium or long-term whereas gambling involves making…