National Stock Exchange chief cautions retail investors against derivatives trading

National Stock Exchange (NSE) chief Ashishkumar Chauhan on Friday cautioned retail investors against trading in derivatives and suggested them to invest in equities through mutual fund route.

He emphasized that trading in Futures & Options (F&O) derivatives should be limited to informed investors who can manage risk and comprehend the market.

Recently, Finance minister Nirmala Sitharaman and chief economic advisor V Anantha Nageswaran flagged the growing risk of F&O trading for retail investors. In November 2023, Sebi chief Madhabi Puri Buch also cautioned investors against heavy bets on F&O."Retail investors should not participate in F&O trading.They should invest in equities through mutual fund route," Chauhan, MD and CEO of NSE, said at an event here.

He cautioned that while derivatives have their utility, it should only be traded by those who fully understand the risks and have the capacity to manage them. Those lacking this understanding or risk appetite should avoid derivatives trading.Despite this, F&O trading continues to grow in popularity, driven by the potential for profit and the rising trading volumes.

The segment's popularity is evident from its massive growth, with the monthly turnover in the F&O segment reaching Rs 8,740 lakh crore in March 2024, compared to Rs 217 lakh crore in March 2019. At the same time, the average daily turnover in the equity cash segment was Rs 1 lakh crore, while the F&O segment saw an average daily turnover of about Rs 330 lakh crore.

F&O trading involves contracts that derive their value from an underlying asset, such as stocks or commodities. Futures contracts obligate the buyer and seller to transact at a predetermined future date and price, while options give the holder the right, but not the obligation, to buy or sell the asset at a set price within a specific period.

These financial instruments are used for hedging risks, speculating on price movements, and arbitraging price differences. However, they come with significant risks, including leverage risk and market volatility, which can lead to substantial losses.F&O trading is largely being utilized as a speculative tool for quick profits in the stock market. However, the reality is that most retail investors are losing money.

A study by the Securities and Exchange Board of India (Sebi) revealed that 89 per cent of individual traders in the equity F&O segment suffered losses, with average losses of Rs 1.1 lakh in FY22.

Additionally, there was an exponential increase in the F&O segment participation during the pandemic, with the total number of unique individual traders increasing from 7.1 lakh in FY19 to 45.24 lakh in FY21, the study noted.

Earlier this month, Sebi proposed stricter norms for the entry of individual stocks in the derivatives segment. The new proposal is aimed at weeding out stocks with consistently low turnover from the F&O segment of the bourses.

Moreover, Chauhan noted the growing participation of retail investors in the stock market.Asked about the much-awaited NSE IPO, he declined to comment on the matter.

On the wishlist for the upcoming Union Budget, he said that Budget should be growth-oriented.