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The Securities and Exchange Board of India (Sebi) has released a study revealing a stark reality for individual traders in the futures and options (F&O) segment of the Indian stock market. In fiscal year 2024 (FY24), a staggering 91.1% of individual traders, approximately 7.3 million, experienced losses, highlighting the significant risks associated with this market segment and prompting concerns about speculation by retail investors. This trend is particularly alarming given that the number of individual F&O traders who incurred losses in FY24 grew considerably from the 89% reported in FY22.
The report provides a comprehensive overview of the losses incurred by individual traders. Collectively, an estimated 11.3 million unique individual traders suffered a total loss of ₹1.81 trillion during FY22-FY24, with FY24 alone accounting for a substantial ₹750 billion in net losses. Furthermore, the study emphasizes the persistence of these losses. Despite experiencing losses in the previous two years, over 75% of the lossmakers continued trading in the F&O segment. This suggests a lack of awareness about the risks associated with derivatives trading and the need for improved investor education and risk management practices.
While individual traders faced significant losses, the study also highlights the profitability of other market participants, namely foreign portfolio investors (FPIs) and proprietary traders. FPIs earned ₹280 billion in FY24, while proprietary traders recorded a gross profit of ₹330 billion. This disparity underscores the complexities of the F&O market, where certain participants, often with greater resources and expertise, can capitalize on market trends while individual investors, especially those with limited experience and risk tolerance, may be more susceptible to losses.
The growing participation of young traders is another concerning trend. The report reveals that 43% of individual F&O traders in FY24 were under 30, a significant increase from 31% in FY23. However, this demographic also experienced higher losses than the overall average, with 93% facing losses. The lack of experience and financial literacy among young traders further underscores the need for robust investor education initiatives to mitigate the risks associated with F&O trading.
Recognizing the need to protect investors and enhance market stability, Sebi has proposed seven measures to strengthen the index derivatives framework. These include increasing the contract value, raising the upfront margin on sellers, and reducing the number of weekly expiries. These proposed measures are expected to mitigate some of the risks associated with F&O trading, but they must be implemented in a manner that ensures the continued development and efficiency of the market while safeguarding the interests of all market participants.
The findings of the Sebi study serve as a stark reminder of the inherent risks associated with F&O trading. Investors, especially individual traders with limited experience, should carefully consider their risk tolerance, financial resources, and investment goals before engaging in such activities. Regulatory efforts to enhance investor education, improve transparency, and strengthen market oversight are crucial to ensure a more balanced and sustainable F&O market in India.
Source: Nine out of 10 individual F&O traders lost money in FY24, Sebi study reveals