Derivatives, intricate financial instruments, have gained popularity among Indian investors, especially the young and those with annual incomes up to ₹5 lakh. Despite 90% facing losses averaging ₹1 lakh yearly, the appeal persists due to low entry costs, minimal financial barriers, and mobile trading accessibility. Young traders are drawn to F&O markets, with those under 30 constituting a significant portion and experiencing high loss rates. The inclusive nature of F&O trading accommodates individuals across income brackets, highlighting a complex interplay of risk and reward.
Derivatives, the intricate financial instruments known for their complexity, have found a special place among Indian investors, particularly the younger generation and those residing in smaller towns with annual incomes up to ₹5 lakh, according to a recent Sebi study. These contracts, which hinge on predicting future price movements to yield profits or losses, have surged in popularity, drawing in a growing number of enthusiasts.
Despite the enthusiasm, a striking revelation emerges: over 90% of these investors are experiencing losses averaging ₹1 lakh per year, a significant portion of their annual earnings. The paradox lies in the fact that despite these losses, the appeal of futures and options (F&O) continues to attract more participants.
What fuels this surge in F&O trading? One major factor is the minimal entry cost. Unlike purchasing stocks, where the full stock price must be paid upfront, options require only the payment of a premium. This lower financial barrier implies that losses are contained, reducing the impact of individual setbacks while cumulatively affecting overall gains.
Furthermore, the accessibility of trading through mobile applications has revolutionized the process, making it remarkably straightforward. Coupled with the influence of financial influencers (finfluencers), many young traders find themselves swept up in the excitement of the market.
A poignant observation emerges: the fundamental instability of markets. This timeless truth, articulated by John Kenneth Galbraith in his 1971 book, continues to resonate today. The market's allure lies in its ability to entice individuals with the promise of effortless wealth, offering glimpses of prosperity and validating their financial acumen, even when lacking true expertise.
The recent Sebi report on F&O underlines these enduring dynamics, highlighting the predominance of young investors in this realm. The proportion of traders below 30 years old has notably risen from 31% in FY23 to 43% in FY24. Intriguingly, this age group also records the highest percentage of loss-makers at 93% in FY24. Conversely, as age increases, the likelihood of incurring losses diminishes, possibly reflecting a reduced appetite for risk among older participants.
In this evolving landscape of financial markets, the allure of derivatives trading persists, intertwined with the ever-present realities of risk and reward. As the trend continues to captivate a new generation of investors, understanding the nuances of these markets remains paramount to navigate the complexities and seize opportunities wisely.
In the vibrant landscape of F&O trading, a significant trend emerges: a majority of participants hail from the segment with modest financial means, earning less than ₹5 lakh annually. Surprisingly, only a meager 6% of F&O traders boast annual incomes exceeding ₹10 lakh, indicating a diverse mix of individuals engaging in these markets.
The statistics reveal an interesting narrative of participation and outcomes. The proportion of traders earning below ₹5 lakh who delve into F&O trading has steadily grown, from 71% in FY22 to 76% in FY24, showcasing a sustained interest from this demographic. Intriguingly, this group also experiences the highest incidence of losses, with a striking 92.2% recording financial setbacks in FY24, a sharp contrast to the 75% of loss-makers within the ₹25 lakh-₹1 crore income bracket.
This data underscores the inclusive nature of F&O trading, welcoming individuals across income strata into the fold. While the statistics may highlight the challenges faced by those with more limited financial resources, it also showcases the resilience and determination of these traders to engage in the complexities of derivatives markets.
Amidst this dynamic backdrop of financial inclusion and risk management, the world of F&O trading stands as a platform where individuals from diverse economic backgrounds converge, navigating opportunities and challenges with a spirit of optimism and perseverance.
It is also noteworthy that an increasing proportion of F&O traders hail from Beyond 30 (B30) cities, which are urban centers that rank beyond India's Top 30 by population. Interestingly, the ratio of F&O traders to mutual fund investors is greater in B30 cities, standing at 28.6% in FY24, in contrast to T30 cities where it was 17.8% in the same period. Essentially, this implies that for every 100 mutual fund investors in B30 cities, there were 28.6 F&O traders.
In FY24, over half of the F&O traders originated from Maharashtra, Gujarat, Uttar Pradesh, and Rajasthan, with Maharashtra leading at 21.7%, followed by Gujarat (11.6%), UP (10.7%), and Rajasthan (6.2%). Among the 15 major states, Uttar Pradesh saw the most significant two-year increase in the number of F&O traders, with a remarkable 186% growth in FY24 compared to FY22, followed by Bihar (179%), West Bengal (177%), and Punjab (162%).
Despite facing financial losses, a significant 76.3% of traders who experienced losses in F&O trading remained undeterred. Among the 24.4 lakh investors who incurred losses in both FY22 and FY23, a notable 18.6 lakh traders persisted with trading in the subsequent year, while only 5.8 lakh decided to halt their trading activities.
The investor landscape can be classified into five distinct categories. Leading the profit charts were proprietary traders, representing financial firms and commercial banks. Following closely were FPIs (foreign portfolio investors), with DIIs (domestic institutional investors such as mutual funds) also managing to secure some profits. On the other end of the spectrum, individuals found themselves as the primary group facing losses. Additionally, the category labeled as "others," inclusive of corporate trusts, NRIs, NGOs, among others, also encountered significant financial setbacks. Proprietary traders, FPIs, and even DIIs, equipped with advanced algorithms, reaped substantial gains, contrasting sharply with individuals who, engaging in market activities through mobile apps, experienced financial losses.
Individuals exhibited a contrasting trend in profits and losses between futures and options trading. While in options, individuals experienced losses amounting to ₹55,000 crore in FY24, they managed to secure profits totaling ₹13,400 crore in futures trading. This resulted in a significant net loss exceeding ₹41,000 crore for individuals in these derivative markets.
Comments