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We all know the stock market’s real purpose-it’s where businesses raise the capital they need to grow, and it’s a platform for investors to build their wealth through smart investments. But here’s a question:
How many investors truly get this and make their decisions accordingly?
The problem is, some investors don’t see the stock market as a wealth-building tool. They view it as a space for trading, and in many cases, they place their bets on F&O (Futures & Options) trading, relying purely on luck.
F&O trading refers to Futures and Options trading, a type of derivative trading where investors can speculate on the future price of an asset.
Their aim is simple: Make big money fast. But are they really profiting, or are they facing heavy losses?
SEBI recently released a report that sheds light on this issue. What does it reveal?
Table of Contents:
- The Rise of Retail Investors
- F&O Dominance
- SEBI’s Eye-Opening Report
- Magnitude of Losses Revealed
- Foreign Investors Profit While Indian Retail Investors Lose
- The Financial Impact of Transaction Fees on Retail Investors
- The Rise of Young Investors in F&O Trading
- Annual Income Declines for Most F&O Traders
- Final Takeaway
The Rise of Retail Investors
After the pandemic, the Indian stock market has seen remarkable growth over the past few years. The bull market that started during this time is consistently reaching new heights each day.
This surge has attracted a significant number of retail investors who are actively investing in equities, both through direct stock purchases and mutual funds.
As more Indian families redirect their savings into the stock market, banks are encountering challenges in attracting sufficient deposits.
This shift in investor behavior is reshaping the financial landscape and raising important questions about the future of both the stock market and traditional banking.
F&O Dominance
While it’s encouraging to see millions of investors entering the stock market, we’ve also noticed a significant increase in the number of small traders engaging in the F&O (Futures and Options) segment.
This type of derivative trading can be quite complex. The values of stocks and indices in this area can fluctuate dramatically on a daily basis, which means the associated risks are extremely high.
In essence, derivatives are not ideally suited for small investors, and they should exercise caution when considering participation in this market.
Larger companies typically use derivatives as a strategy to mitigate their risks. Unfortunately, many small investors who lack a clear understanding of these products often end up facing substantial losses in the derivative market.
SEBI’s Eye-Opening Report
Between the financial years 2021-22 and 2023-24, retail investors suffered losses amounting to ₹1.8 lakh crore in derivatives trading, according to a report released by the Securities and Exchange Board of India (SEBI).
Not only that, but in the derivatives segment, 9 out of 10 small investors have faced losses. In other words, 90% of those who invested in this segment ended up losing money.
In the three-year period between 2021-22 and 2023-24, over one crore individuals participated in derivatives trading, with 93% of them incurring an average loss of ₹2 lakh each.
Magnitude of Losses Revealed
According to SEBI’s report, the top 3.5% of traders who incurred significant losses in F&O (Futures & Options) trading amount to approximately 4 lakh individuals.
On average, each of them faced a loss of around ₹28 lakh. In contrast, only 1% of traders managed to earn a profit exceeding ₹1 lakh.
Losses in F&O trading can arise from various factors, including lack of knowledge about market trends, poor risk management, emotional decision-making, and over-leveraging. Additionally, sudden market volatility can lead to unexpected losses.
Foreign Investors Profit While Indian Retail Investors Lose
While Indian retail investors have faced significant losses in F&O trading, the SEBI report indicates that foreign institutional investors (FPIs) have experienced substantial profits.
In the financial year 2023-24, FPIs reportedly earned around ₹33,000 crore in profits. In stark contrast, during the same year, Indian retail investors suffered losses amounting to ₹61,000 crore.
The Financial Impact of Transaction Fees on Retail Investors
In the financial year 2023-24, Indian retail investors spent an average of ₹26,000 each on transaction fees for derivatives trading.
From the financial year 2021-22 to 2023-24, they collectively incurred transaction costs totaling ₹50,000 crore. Of this amount, 51% was attributed to brokerage fees, while 20% was for stock market fees.
The Rise of Young Investors in F&O Trading
The SEBI report warns that young investors are increasingly entering derivatives trading. Between the financial years 2022-23 and 2023-24, the number of young investors under the age of 30 engaging in derivatives trading has surged by 43%.
Not only in major cities, but derivatives trading has also gained popularity in tier-two and smaller towns.
The fact that the number of traders from smaller towns, excluding the 30 largest cities in India, accounts for 72% of the total derivatives traders illustrates the significant impact of F&O trading in these regions.
Young investors often lack experience and understanding of the complexities and risks involved in F&O trading, leading to significant financial losses.
Annual Income Declines for Most F&O Traders
According to the report, over 75% of derivatives traders earn an annual income of less than ₹5 lakh. It is concerning that individuals with such low earnings continue to incur losses in F&O trading.
Alarmingly, among those who have consistently faced losses, 75% continue to engage in derivatives trading despite the setbacks, as highlighted by the SEBI report.
It is essential for those involved in F&O trading to seriously consider whether they truly need to participate in this market and, if possible, to avoid it altogether.
Final Takeaway
SEBI’s findings highlight the significant risks associated with F&O trading, especially for young and inexperienced investors. With over 75% earning less than ₹5 lakh annually and 90% facing losses, it’s crucial to approach derivatives trading with caution.
Investors should prioritize education and informed decision-making over speculation. Consider alternative, lower-risk investment options to build wealth sustainably.
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