After Finance Minister Nirmala Sitharaman flagged the issue, Managing Director and Chief Executive Officer of National Stock Exchange (NSE) Ashish Kumar Chauhan on Friday advised retail investors not to go for Futures & Options (F&O) trading.
“Retail investors should not participate in F&O trading. They should invest in equities through mutual fund route,” Chauhan said at an event here. He emphasised that trading in Futures & Options (F&O) derivatives should be limited to informed investors who can manage risk and comprehend the market.
Last month, Sitharaman had red-flagged the growing retail participation in the derivatives market. “Any unchecked explosion in retail trading in the futures and options market can create future challenges for the market, investor sentiment, and household finances,” Sitharaman had said at an event held in Mumbai. This remark was made after several options traders were caught off guard by freak movements in underlying indices in April across exchanges, resulting in losses worth hundreds of crores. Following this, BSE said it was taking steps to mitigate sudden spikes in options prices and had ramped up surveillance measures.
F&O trading
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. F&O trading is largely being utilised 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 ₹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 from 7.1 lakh in FY19 to 45.24 lakh in FY21, the study noted.
Chauhan emphasised that while derivatives have their utility, it should only be traded by those who fully understand the risks and have the capacity to manage them. Those lacking this understanding or risk appetite should avoid derivatives trading, he said.
Earlier this month, SEBI proposed stricter norms for the entry of individual stocks in the derivatives segment. The new proposal is aimed at weeding out stocks with consistently low turnover from the F&O segment of the bourses.
Moreover, Chauhan noted the growing participation of retail investors in the stock market. Asked about the much-awaited NSE IPO, he declined to comment. On the wishlist for the upcoming Union Budget, he said that Budget should be growth-oriented.
SEBI advocates tax benefits for companies investing in ‘zero coupon zero principal bonds’
The market regulator, Securities & Exchange Board of India (SEBI) has suggested that the government should allow tax benefits to companies investing in zero coupon zero principal bonds issued by not-for-profit organisations listed at the social stock exchange.
Talking to reporters here on Friday, SEBI’s Whole Time Member Kamlesh Chandra Varshney said the regulator has already sent a proposal to the finance ministry and is hopeful of getting the approval: “We have given the proposal to the government that corporate entities who invest in ZCZPs should get the benefits of CSR (Corporate Social Responsibility). We are hopeful that the government will soon approve the proposal,” Varshney said at an event organised by NSE on SSE here.