93% of Futures and Options investors incur significant losses, reveals SEBI study

New Delhi: Approximately 93 per cent, or over 9 out of 10 individual traders in the equity futures and options (F&O) segment, continue to incur significant losses, a new study by the Securities and Exchange Board of India (SEBI) has revealed.
Despite consecutive years of losses, more than 75 per cent of loss-making traders continued trading in F&O.
The aggregate losses of individual traders exceeded Rs 1.8 lakh crore over the three-year period between 2021-22 and 2023-24, according to the study.
F&O, which stands for Futures and Options, refers to financial derivatives that allow traders to speculate on asset price movements without owning the asset itself. The underlying asset can range from stocks, bonds, commodities, and currencies to indices, exchange rates, or even interest rates.
India's financial market regulator SEBI has expressed concern over speculative activities in the derivatives segment, which go against the original purpose of these asset categories.
The latest study follows a report published by SEBI in January 2023, which found that 89 per cent, or slightly less than 9 out of 10 individual equity F&O traders, lost money in 2021-22.
With increased participation of individual investors in equity and equity derivatives markets, the current study aimed to analyse the profit and loss patterns of individual F&O traders over three years and across all investor categories during the single year of 2023-24.
On average, individual F&O investors incurred losses of approximately Rs 2 lakh (inclusive of transaction costs) over the three-year period.
The top 3.5 per cent of loss-makers, roughly 4 lakh traders, faced an average loss of Rs 28 lakh per person over the same period, inclusive of transaction costs, according to SEBI.
The study found that only 1 per cent of individual traders managed to earn profits exceeding Rs 1 lakh, after adjusting for transaction costs.
In contrast to individual traders, proprietary traders and Foreign Portfolio Investors (FPIs) recorded gross trading profits of Rs 33,000 crore and Rs 28,000 crore, respectively, in 2023-24 (before accounting for transaction costs).
Against this, individuals and other entities incurred losses exceeding Rs 61,000 crore in FY24.
"Most of the profits were generated by larger entities using trading algorithms, with 97 per cent of FPI profits and 96 per cent of proprietary trader profits attributed to algorithmic trading," SEBI said.
On average, individual traders spent Rs 26,000 per person on F&O transaction costs in 2023-24.
Over the three years, individuals collectively spent about Rs 50,000 crore on transaction costs, with 51 per cent of these costs comprising brokerage fees and 20 per cent exchange fees.
The proportion of young traders (below 30 years) in the F&O segment increased from 31 per cent in 2022-23 to 43 per cent in 2023-24.
Individuals from Beyond Top 30 (B30) cities accounted for over 72 per cent of the total F&O trader base, a higher proportion than mutual fund investors, 62 per cent of whom are from B30 cities.
More than 75 per cent of individual F&O traders in 2023-24 had declared an annual income of less than Rs 5 lakh.
"Despite consecutive years of losses, more than 75 per cent of loss-making traders continued trading in F&O," SEBI noted.
The Economic Survey, tabled in Parliament in July, highlighted concerns over derivatives trading in the Indian financial market and called for increased financial awareness.
According to the survey, raising investor awareness and providing continuous financial education are crucial to warning investors of the low or negative expected returns from derivatives trading.