Trading in F&O could be a negative-sum game despite profits. Here's why
The cost of trading Futures & Options (F&O) involves brokerage fees which account for 51% of the transaction costs, then exchanges take 20% and the government collects the remaining 29% as taxes, a Capitalmind Financial Services note said, informing that approximately 1 crore individual traders have contributed around Rs 50,000 crores in transaction costs over the past three years.
“When you buy or sell a derivative contract, the simple assumption is that either you or the counterparty will make money. However, this is not the case. It’s a negative-sum game. Brokerage fees, transaction costs, and taxes can eat up to 25% of your profits or add significantly to your losses”, said Nihit Kshatriya, Senior Research Analyst at Capitalmind Research.
Trading in derivatives is a complex business due to the unpredictable, erratic and random behaviour of the market forces and Capitalmind said that traders require better expertise, institutional knowledge, an experienced team and a technological edge to make money in this business.
Market regulator Securities and Exchange Board of India (Sebi) in a recently published study highlighted that 93% of Individual F&O traders lost money from FY22–FY24. In this period, 1.13 crore unique individual traders incurred a combined net loss of Rs 1.81 lakh crore in F&O.
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