F&O excess: Retail investors are safer staying off derivatives and going long
₹1.1 lakh in 2021-22. Among active traders, the average hit taken by those who incurred losses was more than 15 times the average profit of those in the green. Clearly, the odds are stacked against retail participants.
Often, they have neither a data edge nor the market expertise that institutional players possess. What still draws them to high-risk derivatives is perhaps the scope they hold for placing low-ticket, big-bounty bets on volatile asset prices. Derivative deals take little upfront money, with gains and losses to be squared only at the end of their life.
On occasion, they yield outsized profits, which can have a heady effect that may interfere with rational estimates of one’s future chances. As the F&O segment’s dismal win ratio suggests, it may be easy to get drawn into over-confident trading that goes wrong more than right. It’s good that Sebi has flagged the problem.
“There is a 90% chance that the investor will lose money in the F&O segment," Buch said, “but we also know, and the data shows us, that if you take a long-term view of the market, and if you invest with a long-term perspective, you will rarely go wrong." Retail investors could quibble that their own risk of losses might well be lower, but it’s best not to let conceit get the better of her advice. Households should invest in stocks via diversified portfolios held for long periods of time, attracted by dividends more than capital gains. This is not just safe, it’s also in harmony with the role of stock markets in getting money across to businesses that make better use of it, thereby doing their bit for economic efficiency.
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