Retail Investors Surge in F&O Trading: Risks & Opportunities
Jun 02, 2024 10:58
Retail investor participation in futures & options (F&O) trading is booming, driven by quick profit potential. But experts warn of high risks and advise careful risk management.
New Delhi, Jun 2 (PTI) With growing participation of retail traders in the futures & options (F&O) trading, experts on Sunday said the prospects of quick profits and speculative nature of the instrument has attracted investors to this segment.
They suggested investors to approach F&O trading with thorough knowledge and careful risk management.
Finance minister Nirmala Sitharaman and chief economic advisor V Anantha Nageswaran have recently flagged the growing risk of F&O trading for retail investors. In November 2023, Sebi chief Madhabi Puri Buch also cautioned investors against heavy bets on F&O.
The caution was likely aimed at encouraging a more informed and prudent approach to trading in these products, helping to safeguard investors' financial well-being while allowing them to take advantage of market opportunities.
Despite this, F&O trading continues to grow in popularity, driven by the potential for profit and the rising trading volumes.
The segment's popularity is evident from its massive growth, with the monthly turnover in the F&O segment reaching Rs 8,740 lakh crore in March 2024, compared to Rs 217 lakh crore in March 2019. At the same time, the average daily turnover in the equity cash segment was Rs 1 lakh crore, while the F&O segment saw an average daily turnover of about Rs 330 lakh crore, Vinnaayak Mehta, Founder and Director of wealth management firm The Infinity Group, said.
He, further said that Futures and Options trading is largely being utilized as a speculative tool for quick profits in the stock market.
However, the reality is that most retail investors are losing money.
A study by the Securities and Exchange Board of India (Sebi) revealed that 89 per cent of individual traders in the equity F&O segment suffered losses, with average losses of Rs 1.1 lakh in FY22.
Additionally, there was an exponential increase in the F&O segment participation during the pandemic, with the total number of unique individual traders increasing by over 500 per cent from 7.1 lakh in FY19 to 45.24 lakh in FY21, the study noted.
"F&O trading can be beneficial for hedging and speculative purposes, but it also involves higher risk due to leverage. It's important for retail investors to have a good understanding of these instruments and the associated risks before participating in F&O trading," Tejas Khoday, co-founder and CEO of trading platform FYERS, said.
Pradeep Gupta, co-founder and vice-chairman of Anand Rathi Group, said, "These instruments require minimal capital to start, leading to a surge in participation due to the proliferation of weekly expiries across various indices like Nifty, Bank Nifty, FinNifty, and Midcap Nifty. This increase in participation has resulted in heightened speculation, which poses risks to retail investors."
In the fiscal year 2023-24, the notional value of index options traded on the National Stock Exchange (NSE) doubled to USD 907.09 trillion from USD 447.69 trillion the previous year, he added.
Futures and Options (F&O) trading involves contracts that derive their value from an underlying asset, such as stocks or commodities. Futures contracts obligate the buyer and seller to transact at a predetermined future date and price, while options give the holder the right, but not the obligation, to buy or sell the asset at a set price within a specific period.
These financial instruments are used for hedging risks, speculating on price movements, and arbitraging price differences. However, they come with significant risks, including leverage risk and market volatility, which can lead to substantial losses.
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