A recent study conducted by the Securities and Exchange Board of India (SEBI) has revealed that nearly 93% of individual traders participating in the futures and options (F&O) market faced significant financial losses over the past three fiscal years, spanning from FY22 to FY24. The analysis covered over 1 crore investors, with most experiencing average losses of approximately Rs 2 lakh each.
Key Highlights of the Study:
- Aggregate Losses: Individual traders in the F&O market collectively suffered Rs 1.8 lakh crore in total losses during the period.
- Loss Concentration: Among the worst-hit traders, the top 3.5% (approximately 4 lakh traders) faced an average loss of Rs 28 lakh each, including transaction costs.
- Minority Gained: Only 1% of individual traders managed to secure profits exceeding Rs 1 lakh, even after factoring in transaction costs.
This report follows a similar SEBI study published in January 2023, which indicated that 89% of individual equity F&O traders had incurred losses in FY22. The updated analysis expands on this by examining three fiscal years and providing a more comprehensive view of individual traders' profit and loss patterns.
Insights from the SEBI Report
The study shows a clear disparity between individual and institutional traders. While individual traders struggled to turn profits, proprietary traders and foreign portfolio investors (FPIs) saw notable gains. Specifically, proprietary traders earned Rs 33,000 crore in gross trading profits, and FPIs made Rs 28,000 crore in FY24, before transaction costs.
Interestingly, 97% of FPI profits and 96% of proprietary trading gains were attributed to algorithmic trading, highlighting the dominance of technology-driven strategies in profit generation. This contrasts sharply with the results of individual traders, who spent an average of Rs 26,000 per person on transaction costs in FY24. Over the three years, individuals collectively spent around Rs 50,000 crore on transaction fees, with brokerage charges accounting for 51% of these costs and exchange fees representing 20%.
Trading Patterns and Demographics
The SEBI study also sheds light on the changing demographic patterns in the F&O market:
- Increased Youth Participation: The proportion of young traders (below 30 years) surged from 31% in FY23 to 43% in FY24.
- Geographical Shifts: Traders from Beyond Top 30 (B30) cities made up 72.2% of the total F&O trader base, surpassing the percentage of mutual fund investors (61.7%) from these regions.
Despite the high rate of losses, more than 75% of individual traders continued to trade in F&O markets across consecutive years. This persistence in trading, despite repeated financial setbacks, indicates either a strong belief in potential gains or a lack of understanding of the risks involved.
Income and Financial Profiles
The study also examined the income profiles of F&O traders. Notably:
- Over 75% of traders declared annual incomes of less than Rs 5 lakh in FY24, yet they actively participated in high-risk, high-cost F&O trading.
- The distribution of losses and costs disproportionately affected lower-income traders, raising concerns about the financial literacy and risk management practices of these individuals.
Broader Implications
The findings of this study are significant, particularly as the F&O market has seen an influx of individual participants in recent years. The results highlight the substantial financial risks associated with trading in F&O markets for individual investors, especially those with limited resources and knowledge.
While institutional traders, often equipped with sophisticated algorithms and strategies, continue to profit, the vast majority of individual traders face considerable losses, raising questions about market fairness, accessibility, and the adequacy of investor protection mechanisms.
This report serves as a reminder for individual investors to exercise caution, consider their financial capacities, and seek professional advice before engaging in F&O trading.
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