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The Securities and Exchange Board of India (SEBI) has come out with some interesting findings while conducting an analysis of the profit and loss of individual traders dealing in the equity F&O (derivative) segment. The analysis shows that 89 percent of the individual traders (i.e., 9 out of 10 individual traders) in the equity F&O segment incurred losses, with an average loss of Rs. 1.1 lakh during FY22, whereas 90 percent of the active traders incurred average losses of Rs. 1.25 lakh during the same period.
Is the fact that 9 out of 10 traders lose money something to worry about? Well, it’s rather obvious that equity trading is not for the amateur. Even active traders do not do well -- in fact, they probably lose more due to transaction costs. The SEBI analysis, therefore, is to be commended for warning that stock trading is not a get-rich-quick scheme, nor should it be hyped as such.
But then, the savvy investors always knew this. Short-term trading, when not approached through a process-driven route, is nothing short of gambling. Indeed, viewed from that perspective, it’s a wonder that the success rate in gambling or buying a lottery ticket is much lower than that in stock trading.
For most, the game is also not worth the candle. During FY22, 11 percent of individual traders made a profit with an average profit of Rs 1.5 lakh. The percentage went down marginally to 10 percent for active traders, though the average profit made by them went up to Rs 1.9 lakh during the same period. In short, the average trader made a profit of only Rs 15,833 per month, which is barely enough to survive, assuming trading is the only activity they do.
But Indian traders may be doing better than their international brethren. According to a study in Brazil conducted by researchers at the Sao Paulo School of Economics and the University of Sao Paulo, only 3 percent of traders make money and under one percent do better than minimum wage.
A report published by Tradeciety quoting various sources says 40 percent of traders in the US do not last beyond a month, 80 percent quit within the first two years and only seven percent remain after five years while one percent of all traders are profitable net of fees.
South Korea, which has 40 million trading accounting in a country with a population of 50 million, also has a similar percentage according to media reports, though no authentic research has been carried out.
The number of individual traders coming to the market has increased across the globe, especially after the pandemic. The greed for easy money in a bull market has historically sucked in a lot of traders, only to throw them out in a bear market.
So, why do individual traders come to the market when the overall success rate is so small? One reason why trading attracts individuals is the low entry barrier -- anyone with a demat and a bank account can open a trading account and start trading. But what these individuals forget is trading is like any other business, it requires a plan, a strategy with an edge, proper money and risk management in place.
Those few who have these traits are reaping money. SEBI’s data show that the top 1 percent and top 5 percent active profit makers accounted for nearly 51 percent and 75 percent, respectively, of the total net profit earned by all active profit makers. Trading is a zero-sum game where the participants lose the money collected by the winners.
We at Moneycontrol Pro have interviewed many such successful traders in our GuruSpeak column. Most of these traders come from humble backgrounds and had been loss-making traders for many years before making it big by their pragmatic approach to the market. Like in all professions, a few success stories attract many other aspirants. The same goes for the market. But most individuals do not realise the path to success is paved with hard work, discipline and loads of luck.
Today’s Budget Snapshots puts the spotlight on home sales, which saw a smart bounceback in 2022 in spite of the increase in home loan rates. The question now is: Will demand for homes continue to grow in the face of higher interest rates and higher prices? Against this backdrop, the role of the Union Budget 2023 is critical.
Investing insights from our research team
Weekly Tactical Pick: Why this private bank makes you sit up and take notice
Why is this mutual fund distributor buzzing on bourses since its listing in May last year?
Another great quarter for Dr Reddy’s, but is it sustainable?
VIP Industries Q3 FY23: Why this core portfolio stock needs to be on your radar
Tata Motors Q3 FY23: A strong quarter for both India, international businesses
Bajaj Auto Q3 FY23: Valuation a draw for long-term investors
Pidilite: Why we stay neutral despite raw material tailwinds
Thangamayil Jewellery: Shining opportunity in the long run
Heritage Foods: What lies ahead after a soft quarter?
Home First Finance: Consistent show to support valuation re-rating
Cipla: Sharp improvement in margins not likely to sustain
What else are we reading?
Can we bank on banks to pull Nifty up?
Budget 2023: India needs to look at defence spending in a new way
Why ‘time theft’, ‘quiet quitting’ are two sides of the same problem
There is good news on the global economy
BharOS and the question of apps
ASER Report for 2022: School enrolment up, but learning outcomes dismal
No apparent synergy between BPCL and its planned BeCafes
Personal Finance: Should an investor worry about turnover ratio in equity funds?
The end of Chinese lockdowns and the reopening of trade (republished from the FT)
TN Hari on tech layoffs: Companies must be generous with severance
Shiv Visvanathan writes on tech layoffs: The real sadness is our entrenched silence to a tragedy
India, Cuba bonds to deepen as the two nations steer G20, G77+China
Technical Picks: SBI, REC, Apollo Tyres, Crude oil and ITC (These are published every trading day before markets open and can be read on the app)
Shishir Asthana
Moneycontrol Pro
