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These days, the craze of Future and Options i.e. F&O trading is increasing rapidly in the Indian stock market, but along with it, alarm bells have also rung for investors. Recent SEBI data and warnings from global giants are testifying that entering the stock market without complete information is not free from any big financial risk. According to reports from market regulator SEBI, almost 9 out of 10 individual investors trading in the derivatives market are facing huge losses. In view of this serious situation, the country’s government, market regulators and leading investors from all over the world are continuously warning investors. Let us know what is the underlying truth of this whole matter and why it is being considered a big economic threat.
Shocking figures of SEBI report and the crisis of F&O trading
The recent data released by market regulator SEBI has created a stir in the financial world. According to statistics, almost 90 percent i.e. 9 out of 10 retail traders who try their hand in the futures and options segment are losing their capital. Although in the recent past, due to strict rules and awareness campaigns, there has been a slight decline in the number of active traders, yet the percentage of loss remains the same. According to the data, the average loss per trader has also increased to more than Rs 1 lakh. SEBI and other financial experts believe that the younger generation and new investors are mindlessly venturing into this high-risk segment in their quest to become rich overnight, which is wiping out their lifetime earnings in a jiffy.
Warren Buffett’s old prediction and the ‘time bomb’ of derivatives
Warren Buffett, one of the world’s most successful investors, had long ago issued a big warning regarding financial derivatives. In one of his historical letters, Buffett had termed derivatives and products with high leakages as ‘time bombs’ of the financial world. He had clearly said that these are such instruments which look very attractive and profitable deal, but the dangers hidden in them can destroy the entire economy or individual investors at any time. Buffett also believed that when people start using the market as gambling instead of investing, there is only speculation and loss instead of long-term wealth creation. Today’s Indian stock market and especially the F&O segment is becoming a living example of this theory, where people are engaged in speculation forgetting the basic principles of investment.
Strictness of Government and Finance Ministry, strict steps taken
The government has now become completely serious about the increasing losses and sinking hard-earned money of retail investors. The country’s Finance Minister Nirmala Sitharaman had also expressed concern that the level of speculation in derivatives trading has increased to such an extent that the government cannot remain silent on it. To save small and medium investors from this quagmire, the government and SEBI have taken many strict steps. In this direction, Securities Transaction Tax (STT) on F&O trading has been increased, so that the tendency of frequent speculation can be curbed. Apart from this, brokerage firms and exchanges have also been directed to clearly warn new investors about the risks associated with this segment. The objective of all these administrative and legal initiatives is to ensure that the capital of the country’s retail investors remains safe.
Value Investing vs. Gambling: The Changing Market Mindset
A big ideological war has erupted in today’s modern stock market—on one side there is traditional ‘value investing’ and on the other side there is a blind race to earn profits through short-cut methods. Veteran investors say that in today’s era, instead of investing patiently by understanding the fundamentals of a company, people are investing money in intra-day and options trading like gambling. Citing human nature, experts believe that the thrill of risky games and the greed to earn quick money attracts people, and this is the reason why today instead of being ready investors, a large number of ‘gamblers’ are being born. If this mindset is not changed in time, new investors may have to face even bigger setbacks on the economic front in the coming days.
Important advice for investors: How to save your capital?
If you are also active in the stock market or are thinking of starting a new investment, then it is very important to learn a lesson from all these warnings. Financial experts advise never to venture into dangerous paths like futures and options (F&O) or intra-day trading without proper knowledge, technical analysis and experience. Invest most of your capital in stocks of companies with strong fundamentals for the long term. Stock market is not a get rich overnight scheme, rather it is a game of patience, discipline and financial literacy. Taking the warnings of SEBI and the government seriously and adopting risk management can prove to be the biggest safeguard in the interest of investors.