Synopsis
All the talk about derivates being beneficial for one reason or another is just propaganda. The growth of derivatives trading, and the subsequent financial challenges that the individual traders face, are likely to continue. Avoiding this potentially harmful activity might be the best choice for individuals.
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Dhirendra Kumar
CEO, Value Research
In a research report brought out last year, markets regulator Sebi showed that the futures and options (F&O) trading was a loss-making proposition for investors. The report revealed that 89% investors lost money through these activities, and only 11% made profits. Separately, in an interview with Zerodha CEO Nithin Kamath some time ago, I learnt that there are no more than 5 lakh derivatives traders in the entire country. Since Zerodha is the largest broker by a large margin, Kamath’s statement should be trusted. Considering the above two facts together, one comes to the rather sad conclusion that no more than 55,000 (11% of 5 lakh) individual traders made money from trading in derivatives. At least this is true of 2021-22, the period considered for the study. The vast activity in futures and options trading adds to the enormous noise generated on business TV, YouTube, WhatsApp and other social media, and only around 55,000 people make money from it. If you study the Sebi report in detail, you will find that about half of those who make money earn trivial profits of a few thousand rupees in a year. They would have earned more even with a bank fixed deposit.
The craziest part of this story is that no one in the industry mentions one simple fact: unlike equity, which is backed by the open-ended growth of the economy, F&O is a zero-sum game. Whenever someone earns a profit, it comes out of another trader’s pocket. The thought that a vast majority, over 90%, of the derivative trading activity on Indian exchanges doesn’t generate collective wealth, is striking. If one party is prospering, it’s because another party is facing a loss. So, if all the losses are someone else’s profits, who is pocketing all the money that the ordinary investors are losing? Take a guess. You must have read recently that the National Stock Exchange wants to extend the derivatives trading hours by adding another trading session in the evening. According to reports, the markets will close at the normal hour (3.30 p.m.), but then reopen from 6 p.m. to 9 p.m. At a ‘later stage’, the exchange might extend the evening session to 11.30 p.m. It’s clear that the brokers, exchanges, and those lending stocks profit from this activity, which seems to be the primary objective. If investors trade round the clock, they can also lose money round the clock, which is good for everyone else.
As a reader of this publication, you are almost certainly an individual investor who is interested in making money from investments. However, you should understand that this activity is not designed for you to make money. Instead, it's designed, managed and run to take your money away. All the talk about derivatives being beneficial for one reason or another is just propaganda. Considering the operations of the trading industry and its ability to shape the narrative, nothing is likely to change. The growth of derivatives trading, and the subsequent financial challenges that the individual traders face, are likely to continue. Avoiding this potentially harmful activity might be the best choice for individuals, as it seldom brings any benefits. The facts speak for themselves: with a vast majority of individual traders reaping minimal, if any, benefits from F&O trading, one must ask if it is worth the gamble. It’s not enough to be lured by the glitzy allure of potential profits or be swayed by the pervasive industry rhetoric. Wisdom lies in taking a step back, analysing the facts, and making informed decisions, in order to safeguard your financial future. As the saying goes, ‘It’s not about how much money you make, but how much you keep.’
(The author is CEO, VALUE RESEARCH.)
( Originally published on Oct 23, 2023 )
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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