Nine out of 10 equity F&O traders lose money, 84% of them are men, 75% under 40: SEBI study (2024)

A division of the Securities and Exchange Board of India (SEBI) has released a study report whose results would perhaps dissuade the droves of young, digitally savvy traders tapping the equity F&O segment for some quick and easy money.

The Department of Economic and Policy Analysis in a study report released onJanuary 25analysed the trading patterns and P&L statements of individual investors in the equity F&O segment.

Data for the study has been collated from the top 10 brokers in the country. The total number of traders in the sample witnessed a 500percent increase between FY19 and FY22. In FY19, 7.1 lakh traders were included in the sample which ballooned to 45.2 lakhs in FY22.

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The study report makes a distinction between individual investors and active traders. Individual investors include HUFs and NRIs and exclude proprietary traders, institutions and partnerships firms. Active traders are those who have traded in the equity F&O segment more than 5 times in a year.

The results should, ideally, nudge young investors away from trading and towards long-term investing.

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Consider, for instance, that 89percent of the individual traders (i.e. 9 out of 10 individual traders) in the equity F&O segment incurred losses, with an average loss of Rs 1.1 lakh during FY22. On the other hand, 90percent of the active traders incurred average losses of Rs 1.25 lakh during the same period.

If one needed more evidence to forswear from trading in the equity F&O segment, the report states that during FY22, only 11percent of individual traders in the equity F&O segment made a profit with an average profit of Rs. 1.5 lakh. The percentage went down marginally to 10percent for active traders, though the average profit made by them went up to Rs. 1.9 lakh during the same period.

For the group of active traders-excluding outliers- only 6percentof individual traders in the equity F&O segment made a profit with an average profit of nearly Rs 3,400 in FY22. Substantiating the long-held belief that trading in the equity F&O segment is best left to experts, the report states that the top 1percent and top 5percent active profit makers accounted for nearly 51percent and 75percent of the total net profit earned by all active profit makers, respectively.

For the group of active traders-excluding outliers- on average, loss makers registered net trading loss close to Rs 50,000 in FY22. Further, for the group of active traders, the average loss of a loss maker was 15 times the average profit by a profitable trader during FY22.

The age factor
The report furnishes academic evidence for what most of us have known anecdotally all along: That the new wave of retail investors and traders rushing to the markets predominantly includes people from the younger demographic.

The report states that during FY22, individual traders belonging to the age group 30-40 years had the highest share in participation (39percent) across all age groups. For younger individual traders (20-30 years), the percentage share of participation went up significantly from 11percent during FY19 to 36percent during FY22.

The study report kindles some hope for traders in the below 20 years age category. It states that the average profit earned by profit makers belonging to the youngest age group with below 1percent share in participation, that is the less than 20 years age group, was highest as compared to all other age groups during both FY19 and FY22. However, the average profit earned by them has gone down dramatically: In FY19, the average profitstood atRs 11,26,282, whereas, in FY22, the average profit earned was Rs 4,91,825.

It is the senior citizens who were bested by F&O trading. Their losses in FY22 were the highest compared to losses made by the average loss-makers in the younger than 30 years old age group.

Young investors, on average, seem to be getting the best of all the other age groups: The <20 years age group made an average profit in index options trading during both the years i.e.FY19 and FY22, whereas individual traders from all other age groups incurred average losses during both the year.

Further, the average profit earned by the youngest profit makers was significantly higher than other age groups with an average profit of Rs 5.4 lakh in stock futures followed by an average profit of Rs 3.8 lakh in index options and Rs 1.7 lakh in index futures during FY22.

Having said that, the active traders in the less than 20 years old age group burnt their hands trading in futures, be it index or stock futures. Their average index futures loss at Rs 54,584 outsized all the other age groups. In stock futures, their average loss was Rs 1.12 lakh.

The gender factor

Lastly, trading in the equity F&O segment was dominated by men who accounted for more than 80percent of traders in both years. In FY22, the participation by women receded further as men accounted for 84percent of the total traders compared to women.

However, there is some hope to be drawn from the fact that despite 16percent participation, their share in the profit makers accounted for 28 percent.

Within the active trader group that excludes outlier active traders, the share in profit makers of women was 21 percent.

The average loss made by female loss makers was Rs. 1.3 lakh during FY22, down from an average loss of Rs. 1.9 lakh during FY19. Similarly, the average loss made by male loss makers was Rs. 1.1 lakh during FY22, down from Rs. 1.7 lakh during FY19.

Segment distribution
Between FY19 and FY22, retail investors have been waking up to the immense risk, that is implicit futures trading. This is evidenced by the dramatic fall in individual traders’ participation in the futures segment, which was at 43 percent in FY19 but fell to 11percent in FY22. In the same time frame, participation in Options rose to 98percent from 89percent.

The number of individual traders in index options and stock options went up by nearly 8 and 5 times respectively in FY22 as compared to FY19.

However, the trend of loss-making sustained throughout.

Sample, for instance, that during FY22, 89percent and 82 percent of the individual traders who traded in index options and stock options respectively, incurred losses. The percentage was even higher at 92 percent and 85 percent respectively, for individual traders belonging to the active traders' group without accounting for the outlier traders. Further, 74 percent and 67 percent of the individual traders who traded in index futures and stock futures respectively lost money during FY22, down from 79 percent and 80 percent respectively during FY19. The percentage of loss-makers who traded in index options and stock options went up during FY22 over FY19.

The city of joy

Lastly, the city of joy Kolkata turned out to be the city of loss as well. Average profit by profit makers across segments was highest for Kolkata. Simultaneously, the average loss by loss makers was highest for Kolkata for all segments, except the index option.