SEBI Study Reveals Most Individual Traders in India Lose Money in Futures and Options
A recent study by the Securities and Exchange Board of India (SEBI) has revealed that approximately 93% of individual traders in the equity futures and options (F&O) segment have incurred significant losses. This study covered the period between 2021-22 and 2023-24.
Key Findings
Despite consecutive years of losses, more than 75% of these loss-making traders continued to trade in F&O. The total losses of individual traders exceeded Rs 1.8 lakh crore over the three-year period.
F&O, which stands for Futures and Options, are financial derivatives that allow traders to speculate on asset price movements without owning the asset itself. The underlying assets can include stocks, bonds, commodities, and currencies.
Profit and Loss Patterns
On average, individual F&O investors incurred losses of approximately Rs 2 lakh over the three-year period. The top 3.5% of loss-makers, around 4 lakh traders, faced an average loss of Rs 28 lakh per person.
Only 1% of individual traders managed to earn profits exceeding Rs 1 lakh after adjusting for transaction costs. In contrast, proprietary traders and Foreign Portfolio Investors (FPIs) recorded gross trading profits of Rs 33,000 crore and Rs 28,000 crore, respectively, in 2023-24.
Transaction Costs
Individual traders spent an average of Rs 26,000 per person on F&O transaction costs in 2023-24. Over three years, they collectively spent about Rs 50,000 crore on transaction costs, with brokerage fees and exchange fees making up a significant portion of these costs.
Demographics
The proportion of young traders (below 30 years) in the F&O segment increased from 31% in 2022-23 to 43% in 2023-24. Additionally, individuals from Beyond Top 30 (B30) cities accounted for over 72% of the total F&O trader base.
SEBI’s Concerns and Recommendations
SEBI has expressed concern over speculative activities in the derivatives segment, which go against the original purpose of these asset categories. The Economic Survey tabled in Parliament in July highlighted the need for increased financial awareness and continuous financial education to warn investors about the risks of derivatives trading.
Doubts Revealed
SEBI -: SEBI stands for the Securities and Exchange Board of India. It is a government organization that regulates the stock market in India to protect investors and ensure fair trading.
Individual Traders -: Individual traders are people who buy and sell stocks or other financial products on their own, not for a company or organization.
Futures and Options -: Futures and options are types of financial contracts. They allow people to buy or sell something at a set price in the future. They can be risky because prices can change a lot.
Equity -: Equity means ownership in a company. When you buy a company’s stock, you own a small part of that company.
Proprietary Traders -: Proprietary traders are people or companies that trade stocks, bonds, or other financial products using their own money, not clients’ money.
Foreign Portfolio Investors (FPIs) -: FPIs are investors from other countries who invest in India’s stock market. They buy stocks, bonds, and other financial products.
Derivatives Trading -: Derivatives trading involves buying and selling contracts like futures and options. These contracts derive their value from an underlying asset, like a stock or commodity.
Financial Awareness -: Financial awareness means understanding how money works, including saving, investing, and managing risks. It helps people make better financial decisions.
