In May 2023, SEBI came out with a circular that should have alerted individual traders in equity derivatives. It said four things: (a) 9 out of 10 individual traders in equity Futures and Options segment incurred net losses (b) On an average, loss makers registered net trading loss close to ₹50,000 (c) loss makers expended an additional 28 per cent of net trading losses as transaction costs and (d) Those making net trading profit, incurred between 15-50 per cent of such profit as transaction cost.

It was also mentioned, “Upon login into their trading accounts with brokers, the clients may be prompted to read the risk disclosures and shall be allowed to proceed ahead only after acknowledging the same” and “the risk disclosures shall be displayed prominently, covering at least 50 per cent of the screen”.

More than a year since, it is time to take stock. Our source of data is NSE Market Pulse. In May 2023, average daily turnover (ADT) in equity derivatives, including stock futures, stock options, index futures and index options, was ₹1.62-lakh crore. In April 2024, the ADT was ₹2.54-lakh crore.

Here are the details. In May 2023, the share of individual investors in equity derivatives turnover at NSE was 26.8 per cent of total. In April 2024, it was 25.5 per cent.

A similar percentage on a higher traded volume means individuals are participating more in equity derivatives. Number of individual investors participating in NSE Futures & Options rose from about 10 lakh in 2018-19 to about 96 lakh in 2023-24.

‘Did not pay heed’

When we juxtapose the message from SEBI and this data, we may conclude in spite of the alert, individual derivative traders have not paid heed. You would be wondering what the issue with that is.

The biggest participant in equity derivatives segment is ‘prop’ which means proprietary book or trading with own funds. In April 2024, ‘prop’ share of equity derivatives was 58.5 per cent of total. These are typically brokerages or NBFCs with own funds to play this market. Some of the ‘prop books’ would be individual brokers, who have not become as big as to corporatise and are running as a one-man show. These individuals are professionals in the equity market, they know what they are doing. If you are a first-time participant, you may not have as much awareness as someone doing it for, say, 20 years. If you are lured by the thrill of it, you run not only the usual market risks but an additional risk, emanating from lack of awareness. That is, your risk is higher.

There is another aspect. There are courses run by influencers or ‘finfluencers’. These are short courses with a nominal fee, say ₹10,000 and advertised on social media, with the lure after the course, you will become an expert in equity derivatives and can earn crores of rupees.

Greed, fear

Markets run on greed and fear. The influencers play on your greed, that you will be able to earn in crores. The joke going around in market circles is those who make losses in equity derivatives trading, run these courses to make money. If one is a successful derivative trader and is earning crores for himself / herself, would not have the time or inclination to run courses. They make money from these courses by dint of volume i.e. a large number of ‘students’, in spite of low fees. And large number of ‘students’ flock to it, driven by greed.

To be noted, (a) these courses are not approved by Securities Exchange Board of India (SEBI) or any other competent authority and (b) the people running these do not have any license or permission from SEBI or any other competent authority. The bigger aspect to note is you get 20 years of experience in trading equity derivatives by being there for 20 years, and not by doing a two-week course.

Let’s come to the fundamental aspect. Why would you, as an individual who is not an investment professional, want to invest in equity derivatives? Your objective is, or should be, creation of wealth over the long term. That you can do by purchasing equity stocks or through managed portfolios (mutual funds, PMS, AIF) and remaining invested for long.

The purpose of the equity derivatives market is primarily as a means of hedging where you continue with stocks portfolio but take short-term contra views or positions by paying a margin. If you are participating in the derivatives market only, then you are indulging in short term speculation and not being a long-term investor.

Conclusion

There are known and unknown risks. When a trapeze artiste is doing his / her stuff, s/he knows the risks involved and has been doing it for say 10 years. If you try doing that for the thrill of it by taking one-month training, you are taking unknown risks. One approach could be keep exposure to derivatives limited to a small percentage of portfolio. You should not increase the exposure, for years. Then you would learn the ropes.

The writer is a corporate trainer (financial markets) and author

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