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How Retail Traders are Losing Money in F&O and What They Can Learn

Retail traders preparing for F&O trade

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The Securities and Exchange Board of India (SEBI), which regulates the capital markets in India, recently conducted a comprehensive study on the trading behaviors of various market participants in the Futures and Options (F&O) segment. The goal was to identify potential risks and develop rules and regulations to minimize them, thereby maintaining trust in the capital markets and ensuring smooth operations. This type of study is part of SEBI’s regular efforts to evaluate market functioning.

Table of Contents

Key Findings of the Study

91% of Retail Traders Have Lost Money In F&O

Over the past few years, stock market-related YouTube channels have mushroomed in India. Many YouTubers showcase record profits by adopting certain trading strategies and encourage viewers to replicate these methods. They often present impressive numbers on screen, which creates a misleading impression of the actual risks involved.

As a result, the number of F&O retail traders has doubled from FY22 to FY24. However, this surge has not translated into the financial wellness of retail traders. According to the SEBI study, a staggering 91% of retail traders, roughly 7.3 million, reported trading losses in FY24.

Individual Traders Making Loss Vs No Loss
More Than 90% of Retail Traders Lose Money In F&O Trades

On Average An Individual Trader Lost ₹ 1,20,000 in F&O Trading

On average, each trader lost about ₹120,000 during the 2023-24 fiscal year, which is nearly 65% of per capita income. Such significant losses pose serious challenges for managing everyday expenses, including medical and educational costs. In fact, when faced with losing 65% of their earnings, many traders find it increasingly difficult to meet their household needs, often leading them into a debt trap.

 

Avg Loss Vs Per Capita Income
Retail Traders Lose 65% of Their Average Earnings

The Low Brokerage Does Not Mean Less Cost For The Trader

Why are so many people excited about trading in F&O? They are offered to trade for as little as ₹10 in fees, which sounds great. This is called a decoy pricing strategy, where brokerage firms make F&O trading seem cheaper compared to other stock market investments.

However, the sad truth is that people often end up making many trades each day. They feel good about paying such a low fee for each trade but don’t realize that, on average, they end up spending about ₹26,000 a year. This is more than one-fifth of their total F&O trading losses. They miss the bigger picture.

Transaction cost Vs Loss
It's a Myth That F&O Transaction Costs are Small

Low Brokerage Attracts Retail Traders To Enter F&O Segment With Enthusiasm!!

After losing a significant amount in the first year, it’s common for individuals to consider leaving trading. However, the number of repeat traders is surprising: 75% of traders continue to trade after losing money in their first year because they hope to recover their earlier losses. They watch more YouTube videos and subscribe to many new channels that keep popping up, each offering fresh trading tips.

Every time they watch a new video, they may feel foolish for not discovering that channel earlier. They believe that this time, they won’t make the same mistakes and will surely succeed with the new strategy. The low brokerage acts like the icing on the cake. So, they jump back in with renewed enthusiasm.

Traders Repeat
More F&O Traders Remain Hopeful After 1st Year Loss

But The Enthusiasm Turns Bitter For The Traders!!

With newfound enthusiasm about their “gold mine” strategy, retail traders are hopeful about changing their fortunes. However, they don’t realize that thousands other traders also may be following the same strategy. Apart from other retail traders, there are super computers who build and execute such strategies at lightening speed.

Result: Retail traders’ situation worsens in the second year. Average trading losses have increased from ₹46,000 in case of traders in the first year compared to ₹144,667 in the second year.

New Vs Experienced Traders' Loss
If Retail Traders Repeat, Loss Becomes More

The Trader Who Showed More Enthusiasm Suffered Greater Losses

Some retail traders become so convinced by their new strategies that they achieve premium turnover of ₹10 million or more.

However, for every strategy, there is always a counter-strategy that they often overlook.

As a result, cumulative losses increase along with the trade value. 95% of high-value retail traders incur consistent losses, compared to 91.5% of smaller traders.

Loss Making Traders
More The Trades, More Is The Loss

Result: 99% of Retail Traders Are Either Losing or Not Making Any Meaningful Profits

Without access to high-end technologies, retail traders spend a lot of time in studying and monitoring F&O trading. After all, they are hoping to earn some meaningful profits to take home. However, many traders are not seeing those profits.

In fact, 99% of traders are either losing money or not making any significant profits. Around 400,000 traders lost about ₹2.8 million on average. This amount can seriously impact the mental wellness of many traders.

Do Traders Make Money
Do F&O Retail Traders Really Make Meaningful Money?

There Is Only One Winner: The Algorithmic Trader!!

Institutional traders have gained in the expense of the losses to the individual traders. However, among the institutional traders, only 3.46% of profits are made by the non-algorithmic or non-algo trading entities. (Algorithmic trading is a method where a pre-programmed software tracks the market movements, analyses multiple factors like interest rates, exchange rates, oil prices, and political situations, and executes orders in real time.) So, strike rate of non-algo institutional traders is no better than individual retail traders.

96.54% of profits are made by algo trading institutions that use complex computer programs. 

Unfortunately, individual traders cannot access these advanced algorithmic trading systems because they are very expensive. So, odds are completely against the retail traders to make a profit without these technologies.

Algo Vs Non_Algo Profits
Only 3.46% of Non Algo Institutional Traders Are Able To Make Profits

Retail Traders in Top Cities Are Moving To Mutual Funds For Wealth Creation.

The top 30 cities (T30) are showing more mature behavior in investing, with 38% favoring mutual funds compared to only 28% in the beyond top 30 cities (B30).

However, B30 cities have a larger proportion of F&O retail traders, with 72% compared to 62% in T30 cities.

Will T30 cities reach at least 50% mutual fund investors while B30 cities try to catch up?

This change won’t happen overnight. In the meantime, will individual traders continue to incur heavy losses?

MF Investors Vs F&O Traders
T30 Produces More MF Investors Than F&O Traders

What Retail Traders Can Learn From The Study ?

  1. F&O trading may not be suitable for all individual traders. These products can help manage risk in your stock portfolio, but they require a deep understanding and 5-10 years of experience in capital markets. Retail traders should be cautious when dealing with these products.

  2. If you feel pressure from your friends to enter F&O trading, consider dedicating only a small amount of capital. If that capital is lost, it might be a sign to step away from F&O trading.

  3. If you find yourself watching too many YouTube videos about options trading, it might be time to take a break. These videos often don’t contribute positively to your mental or financial well-being. If YouTubers are making millions from options trading, why would they share their secret strategies? Check the credentials of the YouTuber before believing anyone blindly.

  4. In F&O trading, execution speed is crucial, which means you should be having access to advanced technology. If you don’t have access to tools like algorithmic trading, it’s better to avoid F&O trading.

  5. Avoid borrowing money to trade in F&O. If you don’t have the capital to allocate for trading, it’s best not to engage in it. Borrowing for trading can lead to serious financial problems.

  6. Keep these lessons in mind. They can help guide your trading decisions and promote better financial health.

Who will Take the First Step: The Regulator or Individuals?

SEBI is considering several actions, such as increasing the minimum lot size, adjusting upfront margin requirements, removing margin benefits for calendar spreads, reducing the number of option contracts per scrip, and increasing margins near expiry to protect the capital markets from collapsing. Additionally, it is developing an AI-based surveillance system to prevent fraudulent trading practices.

However, regardless of whether SEBI takes action, it’s important for you to be cautious about your financial wellness. You have put a lot of effort into earning your money, and it can be devastating to see losing the money without any benefits to you. Planning for financial wellness is not a luxury but a necessity. Your financial wellness will lead to a better overall life, your mental, physical and spiritual wellness. 

If you or any of your friends are already involved in or considering entering F&O trading, we recommend reading two relevant articles: “Speed Thrills But Kills” and “Patience Is A Virtue.” Subscribe to our newsletter and join a fast-growing community of like-minded individuals to get the analysis you need for your financial wellness. We offer all the tools you need for your financial wellness as part of the Next Gen Personal Finance Solutions suite.

Let us know in the comments if you liked this article—your feedback matters!

Data sources: SEBI, Statista, Bloomberg, Reuters

 

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Disclaimer: This article is the personal opinion of the author. The information in the article is generic and not tailored to specific situations of individuals. Therefore, the article is for informational purposes only and not intended to be personal financial advice or any kind of recommendation. Readers should understand that there is an inherent risk involved with financial decisions and should consult financial advisors for help with any investment advice. Neither the author nor Lifespectrum360.com is liable for the decisions readers make.

Picture of Birendra Sahu

Birendra Sahu

Birendra is a seasoned finance professional with over two decades of expertise in the financial industry. He has experience in several multinational banks in both operations and technology. His areas of expertise are Investment Banking, Asset and Wealth Management, Treasury and Risk Management.

FAQ

Studies suggest that a significant portion of retail traders experience losses, with estimates indicating that around 90% of retail traders lose money overall.  99% of the retail traders cannot make money beyond 1,00,000 per year i.e. 8,250/- per month.

 

The statistic that 95% of traders lose money is frequently cited to emphasize the challenges in trading. Common reasons for these losses include a lack of education, insufficient risk management, emotional decision-making, and an inability to adapt swiftly to changing market conditions. Additionally, significant profits are often generated by algorithmic trading entities, which retail traders typically do not have access to.

Yes, many studies and surveys indicate that about 90% of retail traders may incur losses. This statistic reinforces the idea that trading is highly challenging and not as straightforward as it may seem. Success often requires significant knowledge, experience, a disciplined approach to risk management and access to high-end technologies like algorithmic trading..

Here are five common reasons traders may incur losses:

  1. Lack of Education: Many traders enter the market without a solid understanding of trading principles and strategies.
  2. Poor Risk Management: Failing to set stop-loss orders or allocate capital wisely can lead to significant losses.
  3. Emotional Decision-Making: Allowing emotions to dictate trading decisions often results in impulsive actions and poor outcomes.
  4. Inadequate Trading Plan: Trading without a well-defined strategy can lead to inconsistent results and increased risk.
  5. Market Volatility: Trading in the stock market often involves very thin margins. Traders who do not have access to high-end technologies, such as algorithmic trading, which allows for lightning-fast execution, can be caught off guard, leading to significant losses.

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