Individual investors should avoid trading in F&O segment as it’s clearly a loss-making proposition

economictimes.indiatimes.com:

futures and options (F&O) trading was a loss-making proposition for investors. The report revealed that 89% investors lost money through these activities, and only 11% made profits. Separately, in an interview with Zerodha CEO Nithin Kamath some time ago, I learnt that there are no more than 5 lakh derivatives traders in the entire country.

Since Zerodha is the largest broker by a large margin, Kamath’s statement should be trusted. Considering the above two facts together, one comes to the rather sad conclusion that no more than 55,000 (11% of 5 lakh) individual traders made money from trading in derivatives. At least this is true of 2021-22, the period considered for the study.

The vast activity in futures and options trading adds to the enormous noise generated on business TV, YouTube, WhatsApp and other social media, and only around 55,000 people make money from it. If you study the Sebi report in detail, you will find that about half of those who make money earn trivial profits of a few thousand rupees in a year. They would have earned more even with a bank fixed deposit.

The craziest part of this story is that no one in the industry mentions one simple fact: unlike equity, which is backed by the open-ended growth of the economy, F&O is a zero-sum game.

Whenever someone earns a profit, it comes out of another trader’s pocket. The thought that a vast majority, over 90%, of the derivative trading activity on Indian exchanges doesn’t generate collective wealth, is striking. If one party is prospering, it’s because another party is facing a loss.