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Why 93% of Indian Individual Investors Lose Money in Equity Derivatives

Why 93% of Indian Individual Investors Lose Money in Equity Derivatives: SEBI Report

A recent study by SEBI reveals alarming insights into individual participation in the equity futures and options (F&O) market.

The study, covering the period from FY22 to FY24, shows that 93% of individual traders incurred losses in F&O trading, with aggregate losses surpassing ₹1.8 lakh crores.

This is a visible escalation from the earlier finding in January 2023, which indicated that 89% of traders lost money in FY22 alone.

The study highlighted significant trends in the profitability of various categories of traders, the distribution of profits and losses, and the demographic and behavioral factors affecting trading outcomes.

Findings

High Proportion of Losses Among Individual Traders

  • Over the three years (FY22 to FY24), 93% of individual traders experienced net losses in F&O trading.
  • 1.13 crore individual traders collectively incurred a staggering net loss of ₹1.81 lakh crore during this period.
  • In FY24 alone, 91.1% of individual traders (about 73 lakh) incurred an average loss of ₹1.20 lakh per person, slightly down from ₹1.43 lakh per person in FY23.
  • The top 3.5% of loss-making traders faced significantly larger losses, averaging ₹28 lakh per person.

Profits Concentrated Among Proprietary Traders and Foreign Portfolio Investors (FPIs)

  • Proprietary traders recorded gross profits of ₹33,000 crore, and FPIs grossed ₹28,000 crore in FY24.
  • These profits were primarily driven by algorithmic trading, with 97% of FPI profits and 96% of proprietary traders’ profits generated by algo trading.
  • In contrast, individual traders and others incurred gross losses exceeding ₹61,000 crore in FY24 alone.

Transaction Costs – A Major Contributor to Losses

  • Individual traders spent over ₹50,000 crore in transaction costs over the three-year period, with an average of ₹26,000 per trader in FY24.
  • More than 51% of these costs were brokerage fees, and 20% were exchange fees, while taxes such as STT, GST, and stamp duty also contributed significantly.

Product Preference and Profitability

Options Trading Dominates

  • 99.3% of F&O traders engaged in options trading, with only 5.9% trading in futures in FY24.
  • Individuals were more likely to lose money in options trading (91.5% of options traders incurred losses), whereas only 60% of futures traders experienced losses in FY24.

Distribution of Losses

  • Losses were highly skewed toward a small subset of high-turnover traders. While 17% of traders (high-value traders) contributed to 81% of total losses, small-size traders (30.5 lakh traders) contributed just 0.1% to total turnover but incurred 1% of the total losses.

Demographic Insights

Young Traders Face Higher Risks

  • The proportion of traders under 30 years old increased from 31% in FY23 to 43% in FY24. Among these young traders, 93% incurred losses, slightly higher than the overall average.
  • Older traders (>60 years) had a lower proportion of loss-makers at 79%.

Low-Income Traders at a Disadvantage

  • 76% of F&O traders in FY24 had declared an annual income of less than ₹5 lakh, with 92% of these low-income traders incurring losses.
  • On the other hand, high-income traders (earning more than ₹1 crore annually) had the lowest percentage of loss-makers and even managed to make a consolidated net profit of ₹259 crore in FY24.

Gender Trends

  • Female traders made up 13.7% of F&O participants in FY24, down from 14.9% in FY22. However, 86.3% of female traders incurred losses, compared to 91.9% of male traders.
  • Female traders also had lower average losses (₹75,973) compared to their male counterparts (₹88,804).

Geographic Trends

Increased Participation from Smaller Cities

  • A significant proportion of F&O traders (72% in FY24) hailed from Beyond Top 30 (B30) cities, up from 68% in FY23. This contrasts with the mutual fund market, where only 61.7% of investors were from B30 cities.
  • States like Maharashtra, Gujarat, and Uttar Pradesh led in trader numbers, with Telangana and Andhra Pradesh having the highest average per person losses.

Traders Persist Despite Losses

  • Despite consecutive years of losses, 76.3% of loss-making traders continued to trade in F&O markets. However, only 8.3% of these persistent traders made a profit in the third year after incurring losses in the previous two.

Take Home

  • The SEBI study illustrates a concerning trend in the Indian F&O market, where the vast majority of individual traders consistently incur losses.
  • High transaction costs, the complexity of options trading, and the increased participation of younger, low-income traders from smaller cities have contributed to these losses.
  • In contrast, proprietary traders and FPIs, largely relying on algorithmic trading, have managed to generate substantial profits.
  • These findings highlight the need for better investor education, risk management, and suitability assessments to ensure that individual traders understand the risks involved in derivatives trading.