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Why Trading in F&O is Like Burning Your Money

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From two lakh trades in FY19 to 45 lakh trades in FY22, there has been a huge jump in Futures & Options trading in the last four years. The primary reasons for this spike were the COVID-19 pandemic and access to Apps. As most people were at home during the pandemic and had much time in hand to explore something new, there was an uptick in F&O trading during that time. Also, the availability of Apps has made trading in F&O very easy and convenient.

Futures & Options are called financial derivatives as they have an underlying asset from which they derive their value. Eg. Adani Enterprise February Futures. Like stock derivatives, we also have commodity derivatives.

Why do I think F&O trading can be dangerous for normal investors?

I think F&O can be dangerous for normal investors as these instruments use a lot of leverage which means that if you want to buy Rs.1 lakh worth of Adani Enterprise futures you will have to pay only Rs.10K or just ~10% of the value. This 10% is not fixed, it can vary, say ~15%-20%. These attract a lot of investors as they can buy a large number for a very less amount of money.

Eg. if you had Rs.1 lakh in AE futures and the price increased by 10%, then your total amount becomes Rs.1.10 lakhs and you will make Rs.10K or 100% returns on your investment. However, the flip side is that if the price went down by 10% then you would lose 100%. The reason is that leverage cuts both ways.

F&O is for sophisticated investors or big institutions. They are mostly used for hedging and other purposes rather than speculation. History has proven that almost all retail investors tend to lose money in F&O trading. There are many investors going bankrupt both in India and abroad. SEBI recently came out with a study that shows that 90% of investors lost money in F&O trading in 2023. Out of the 45 lakh trades, 40 lakhs lost on an average of Rs.1.25 lakhs and the top 5% of traders made ~75% of overall profits.

So my advice is you should avoid F&O like a plague as you are guaranteed to lose money. Even if you have beginner’s luck and made money in the 1st and 2nd trades, over time you will lose. There are unscrupulous brokers who would advise you to trade on F&O on their tips. Just avoid them as they will make their commission but you will lose your money. Also, read more about Asset Allocation.

PG

Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to greensneha@yahoo.in

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