Risk Disclosure for Individual Equity F&O Traders

The Securities and Exchange Board of India (SEBI) is exploring new safeguards for investors. SEBI has requested all stock brokers to show 'Risk disclosures' on their websites and to all of their clients in order to reduce the threat and risk among individual investors and increase the awareness of trading in the equity Futures & Options (F&O) segment.

"When clients log into their trading accounts with brokers, they may be prompted to read the 'Risk disclosures' (which may appear as a pop-up window upon login) and will be permitted to proceed only after acknowledging the same." "The 'Risk disclosures' shall be prominently displayed, covering at least 50% of the screen," SEBI stated in a circular.

The SEBI study on derivatives trading revealed some worrisome numbers about individual traders in the equity F&O (Futures and Options) segment during FY22. It found that a large majority, around 89 percent, of individual traders faced losses, losing an average of Rs 1.1 lakh. Similarly, about 90 percent of active traders had average losses of Rs 1.25 lakh, while active traders (excluding extreme cases) experienced net trading losses of around Rs 50,000 on average. On the other hand, a smaller group, roughly 11 percent of individual traders, managed to make average profits of Rs 1.5 lakhs.

The average profit for active traders increased to Rs 1.9 lakh during the same period. Interestingly, about 6 percent of individual traders in the equity F&O segment made modest average profits of around Rs 3,400. The study also highlighted that the top 1 percent and 5 percent of active traders who made profits accounted for a significant portion of the total net profit earned by all profit-making traders, approximately 51 percent and 75 percent, respectively. It's important to note that the number of individual traders increased significantly, almost 8 and 5 times, respectively, in the last three years. Furthermore, the data showed that during FY22, 98 percent of unique individual traders engaged in options trading, while 11 percent participated in futures trading, compared to 89 percent and 43 percent, respectively, during FY19.

SEBI's data, based on a sample from the top 10 brokers, revealed a significant increase in the number of unique individual traders in the F&O segment. In FY22, there were 45.2 lakh individual traders, compared to only 7.1 lakh in FY19. Among these traders, 88 percent were active, meaning they regularly traded, but unfortunately, they consistently faced losses. Furthermore, over 80 percent of the traders in the F&O segment were male.