Leader of Opposition of Lok Sabha Rahul Gandhi on Tuesday took to X to insinuate that the small investors are losing on the stock market because of some so-called big players.
Uncontrolled F&O trading has grown 45x in 5 years.
— Rahul Gandhi (@RahulGandhi) September 24, 2024
90% of small investors have lost ₹1.8 lakh Cr in 3 years.
SEBI must reveal the names of the so called “Big Players“ making a killing at their expense.
He claimed that the uncontrolled futures and options trading has grown 45 times in the past five years and 90% of small investors have lost Rs 1.8 lakh crore in the last 3 years. He then asked the SEBI, the market regulator, to reveal the name of so-called big players because of which the said small investors have lost their monies.
The senior Congress leader was referring to the recently released SEBI study wherein it said that 93% of individual traders had incurred losses in equity futures and options in the last three years.
The said study was undertaken following increased participation of individual investors in equity and equity derivatives market and to understand the profit and loss pattern for individual traders.
The study revealed that out of the 1 crore F&O traders, over 93% of them incurred an average loss of about Rs 2 lakh per trader including the transaction cost. The top 3.5% traders, that is about 4 lakh of them, incurred an average loss of Rs 28 lakh per person over the same period. Only 1% of individual traders had managed to earn profits exceeding Rs 1 lakh.
Contrary to individual traders, proprietary traders and foreign portfolio investors booked gross profit of Rs 33,000 crore and Rs 28,000 crore respectively in FY24. As against this, individual traders incurred a loss of Rs 61,000 crore in the same period. Most of this profit of larger entities came via algorithmic trading. Hindenburg Research, the American short selling firm which has been running an anti-Adani propaganda giving ammo to Congress to attack PM Modi, is one such institutional investors which is accused to have made a huge amount of profit over market manipulation by releasing reports and indulging in fearmongering.
The study also found that there has been an increase in young traders, below the age of 30 in the F&O segment. Their participation increased from 31% in FY23 to 43% in FY24. In fact, as many as 70% of individual investors came from beyond the top 30 cities in India. It must be noted that over 1 crore F&O traders suggest a wider user base and that means that the market participation is fairer. If participation is less, it would leave higher scope for manipulation and power would be concentrated with just few. But higher market participation suggests fairness in the workings of the market.
Another curious detail from the study that Rahul Gandhi forgot to mention in his tweet was that 75% of these individuals in FY24 had declared an annual income of less than Rs 5 lakh. And despite continuous losses, more than 75% of those loss-making traders continued to trade in the F&O segment.
Let us now simplify the F&O trade which is often known as the weapon of mass destruction. Futures and Options are contracts signed by two parties for trading a particular stock at a predetermined price on a later date. This kind of contract aims to hedge one’s risk in the stock market against possible loss in a future date by locking the price of the asset. Futures and Options derive their price from an underlying asset such as share, commodities, etc. However, prices of these underlying assets are determined by market forces and cannot be predicted. Hence, these price movements could cause substantial losses or profits to investors. And as the disclaimer for investment says, these investments are subject to market risks. Futures are a liability for investors since whatever the market condition, the investor is obligated to follow up on the contract whereas the Options give them the option to not exercise it on the due date.
An individual is expected to know that they could make profit or loss in the investment and only those who have the risk appetite along with the loss-bearing capacity along with knowledge of how stock markets operate indulge in F&O trading. An investor knows what he is getting into. Further, F&O are just one of the many ways to invest in the stock market with the intention of wealth generation, like mutual funds which come with lower risk than F&O.
Stock market, contrary to what Rahul Gandhi wants people to believe, works on market forces and it is not the government or regulatory body’s responsibility. If an individual invests in F&O in hopes of making easy money, the government cannot be held responsible for it if they incur losses. If the winnings are for the investor to enjoy, the losses are also for them to bear and hence once they realise they are getting into the loss cycle, instead of continuing to do so, they should stop further trading. However, the human psyche is such that they believe that they will leave once they recover the losses they have made and continue getting deeper and deeper into the loss-trap. However unfortunate that is, it is not the government or the regulator’s responsibility.
The market bodies have been regularly carrying out investor education programs where they talk about sound investment practices and has also time and again warned against speculative trading. Individual indulging in trading and facing losses is not on the government but on the individual. Caveat Emptor: Let the buyer beware.