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The Indian financial markets witnessed a period of significant growth in Fiscal Year 2024 (FY24), with various indices reaching record highs. However, despite this bullish market sentiment, a recent study by the Securities and Exchange Board of India (SEBI) reveals a stark reality for traders participating in the Futures and Options (F&O) segment. The study found that a majority of F&O traders, both new and regular, incurred significant net losses during the fiscal year.
The data presented by SEBI paints a concerning picture for the F&O market. 'New Traders', defined as those who entered the market for the first time in three years during FY24, comprised nearly half of all F&O traders in the fiscal year. This influx of new participants did not translate into profitable ventures, as 92.1% of these 'New Traders' suffered an average loss of roughly Rs 46,000 per person. The situation was equally discouraging for 'Regular Traders' - those who actively traded for all three consecutive years between FY22 and FY24. While making up only 25% of the total trader population, a staggering 88% of 'Regular Traders' incurred losses averaging Rs 1.50 lakh per person during FY24.
The losses incurred were not limited to a specific group of traders; both new and experienced participants faced substantial financial setbacks. This indicates a systemic issue within the F&O market, highlighting the inherent risks and complexities associated with this segment. The study also reveals that the losses sustained by traders far outweighed the profits made by those who were successful. Loss-making traders incurred losses of Rs 1.20 lakh per person on average, while those who managed to make profits generated only Rs 1.03 lakh per person in earnings. This disparity emphasizes the significant downside potential within the F&O market, where the risk of substantial losses overshadows the potential for high returns.
Further analysis of the SEBI data reveals a concerning trend regarding transaction costs. The study highlights that losing traders bore a disproportionate burden of transaction costs, paying roughly 27% of the costs over and above their losses. In contrast, profitable traders incurred only about 22% of transaction costs as a percentage of their gross profits. This suggests that the market structure and associated fees might be contributing to the overall losses incurred by F&O traders, making it even more challenging for participants to achieve profitability.
The findings of the SEBI study serve as a stark reminder of the inherent risks involved in the F&O market. While the market offers the potential for high returns, it also carries a considerable risk of significant losses. The study underscores the importance of adequate understanding of the complexities of derivatives trading, proper risk management strategies, and the need for investors to approach F&O trading with caution. The data also raises concerns about the suitability of the F&O market for novice investors, particularly given the high prevalence of losses among 'New Traders'.
Source: F&O trading: 'New' or 'Regular', majority of them incurred losses in FY24, shows Sebi data