NSE Chief Ashish Chauhan Warns Retail Investors On High-Risk Derivatives Trading
Although derivatives have their uses, they should only be traded by individuals who completely grasp the risks involved and have the ability to control them, he said.
Ashishkumar Chauhan, the head of the National Stock Exchange, advised individual investors on Friday to be cautious when trading in derivatives, and recommended investing in stocks via mutual funds instead. Engaging in futures and options trading should be restricted to knowledgeable investors, capable of handling risks and understanding the market, he said.
Finance Minister Nirmala Sitharaman and Chief Economic Advisor V Anantha Nageswaran have raised concerns about the increasing risk of F&O trading for retail investors. In November 2023, SEBI Chief Madhabi Puri Buch also advised investors against making large bets on F&O.
"Retail investors should not participate in F&O trading. They should invest in equities through mutual fund route," Chauhan, managing director and chief execeutive officer of NSE, said at an event in Mumbai.
Although derivatives have their uses, they should only be traded by individuals who completely grasp the risks involved and have the ability to control them. Those without this comprehension or inclination for risk should steer clear of trading derivatives, he warned.
Despite this, F&O trading continues to grow in popularity, driven by the potential for profit and the rising trading volume. 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, as compared with 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 loss.
F&O trading is largely being utilised as a speculative tool for quick profit 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 revealed that 89% of individual traders in the equity F&O segment suffered loss, with average loss 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 it should be growth-oriented.
(With text inputs from PTI)
