A recent study by the Securities and Exchange Board of India (SEBI) has sent shockwaves through the trading community. The updated findings, released in September 2024, reveal that an overwhelming 93% of individual traders in the equity Futures and Options (F&O) segment suffered significant losses between FY22 and FY24. The aggregate losses for retail traders in this period have surpassed ₹1.8 lakh crores, raising critical questions about retail participation in high-risk financial instruments.

The SEBI Study: Key Insights

The SEBI study, a follow-up to earlier reports, presents a comprehensive analysis of the financial outcomes for individual traders in the F&O segment. The study highlights that only 7% of retail participants made any profit during the three-year period, and a vast majority encountered substantial losses. The study serves as a wake-up call for retail investors, regulators, and market participants alike.

You can access the full SEBI report through this link.

Key Findings from the Report

• High Percentage of Losses: A staggering 93% of individual traders incurred losses during the study period. This trend is consistent with the notion that F&O trading involves higher risks, often unsuitable for inexperienced traders.
• ₹1.8 Lakh Crores in Losses: The collective losses amount to ₹1.8 lakh crores over three years, underscoring the financial impact of speculative trading without adequate knowledge or risk management.
• Skewed Profitability: While a small 7% of traders managed to generate profits, this suggests that only those with either professional expertise or a highly disciplined trading strategy could navigate the complexities of F&O trading successfully.
• Retail Participation Growth: Despite the overwhelming losses, retail participation in the equity F&O segment continued to grow, spurred by the accessibility of online trading platforms and increased interest in the stock market during and after the pandemic years.

Why Do So Many Retail Traders Incur Losses?

The SEBI study sheds light on several reasons why retail traders face such significant losses in the F&O market:

• Lack of Knowledge: Trading in futures and options requires a deep understanding of market dynamics, price movement, and risk management, which many retail traders lack.
• Emotional Trading: Many individuals engage in emotionally driven trading, reacting impulsively to market fluctuations without a well-thought-out strategy.
• High Leverage: The lure of high leverage in F&O trading allows individuals to control larger positions with smaller capital, but it also amplifies losses when trades move in the wrong direction.
• Short-term Speculation: Most retail traders approach F&O trading with a speculative mindset, focusing on short-term gains rather than long-term investment strategies. This often leads to rash decisions and quick losses.

Key Findings from SEBI’s Study

• High Loss Rates Among Individual Traders
  The study reveals that 93% of over 1 crore individual F&O traders incurred average losses of ₹2 lakh per trader (inclusive of transaction costs) between FY22 and FY24. Even more concerning, the top 3.5% of loss-makers—approximately 4 lakh traders—faced an average loss of ₹28 lakh per person over this period. This paints a sobering picture for retail investors, as only 1% of individual traders managed to earn profits exceeding ₹1 lakh after accounting for transaction costs.
• Profits for Proprietary Traders and FPIs
  While individual traders suffered, proprietary traders and Foreign Portfolio Investors (FPIs) as a class enjoyed significant profits. In FY24 alone, proprietary traders and FPIs booked gross trading profits of ₹33,000 crore and ₹28,000 crore, respectively. This stark contrast highlights the disparity in performance between individual traders and larger entities, many of which leverage sophisticated algorithmic trading strategies. In fact, 97% of FPI profits and 96% of proprietary trader profits were generated through algorithmic trading.
• The Burden of Transaction Costs
  One of the most significant barriers to profitability for individual traders is the high transaction costs. On average, individual traders spent ₹26,000 per person on F&O transaction costs in FY24. Over the three-year period, individuals collectively spent around ₹50,000 crore on transaction costs, with brokerage fees accounting for 51% and exchange fees making up 20% of these costs. The cumulative effect of these expenses further erodes the potential for profit.
• Demographic Shifts: Younger and B30 City Traders
  The study also highlights a shift in the demographic makeup of F&O traders. The proportion of young traders (under 30 years of age) increased from 31% in FY23 to 43% in FY24, indicating a growing interest in high-risk trading among younger individuals. Additionally, 72% of individual F&O traders came from Beyond Top 30 (B30) cities, outpacing the proportion of mutual fund investors from these regions. This trend points to the growing participation of retail traders from smaller cities and towns.
• Income Profiles and Persistence of Loss-Making Traders
  More than 75% of individual F&O traders in FY24 declared an annual income of less than ₹5 lakh, suggesting that many of these traders may not have the financial cushion to absorb significant losses. Despite enduring consecutive years of losses, over 75% of loss-making traders continued to participate in F&O trading. This persistence raises concerns about the understanding of risk and the influence of speculative behavior.

Regulatory Implications and SEBI’s Role

SEBI’s findings are likely to influence future regulatory frameworks in India’s equity markets, particularly around retail investor protection. The study brings to light the importance of financial literacy and responsible trading practices. SEBI has previously introduced initiatives aimed at educating traders about the risks involved in derivatives trading, but the new data suggests that further interventions may be necessary.

SEBI’s ongoing efforts to promote investor education and financial literacy are critical, and the regulator is likely to take steps to mitigate the risks retail traders face in the F&O market.

Steps to Minimize Losses in F&O Trading

For retail traders looking to participate in the F&O market, adopting a disciplined approach and prioritizing risk management is essential. Here are a few recommendations for reducing trading risks:

• Educate Yourself: Before diving into F&O trading, it’s crucial to understand how these financial instruments work. Familiarize yourself with market trends, technical analysis, and trading strategies.
• Limit Leverage: While leverage can enhance gains, it can also magnify losses. Retail traders should use leverage cautiously and be aware of its risks.
• Develop a Trading Plan: A well-structured trading plan can guide traders in executing trades based on analysis rather than emotions.
• Diversify Strategies: Avoid putting all your eggs in one basket. Use a diversified trading approach, and never rely solely on F&O trading for financial gains.
• Paper Trade: Many platforms offer simulated or paper trading, allowing individuals to test strategies without putting actual capital at risk.

SEBI’s Regulatory Initiatives

• Enhanced Disclosure Requirements: SEBI may enforce stricter disclosure norms for brokers to inform clients about the risks involved in F&O trading.
• Eligibility Criteria: Introducing minimum net worth or experience requirements for individuals to participate in the F&O segment.
• Investor Protection Programs: Launching initiatives aimed at educating investors about the risks associated with high-leverage trading.
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Conclusion

The latest SEBI study serves as a stark reminder of the risks associated with equity F&O trading. While the allure of quick profits draws many retail traders to these high-risk markets, the harsh reality is that only a small fraction succeed. SEBI’s findings emphasize the importance of proper education, financial literacy, and risk management for individual traders to avoid falling into the 93% who incur losses.

It is now more critical than ever for retail investors to approach F&O trading with caution, armed with knowledge, a disciplined strategy, and a strong focus on long-term financial health.

For more information, read the complete SEBI press release here.

Disclaimer: The information provided in this article is based on data available up to October 2023. For the most recent updates and detailed statistics, please refer to the official SEBI website or recent press releases.