Afzal Lokhandwala, 2022 USIC champion, lauds SEBI’s recent study about risks involved in derivatives trading

Over time, more and more Indians are getting on the bandwagon of trading and investment. From day traders and swing traders to long-term investors, Indians are getting savvier about optimizing their savings. The abundance of information and easy access to the same has made it possible for anyone to become a retail investor. However, where one has multiple options at their disposal without adequate knowledge, they are likely to make the wrong call.

Considering such choices that can lead to people losing their hard-earned savings, Afzal Lokhandwala lauds and promotes SEBI’s recent disclosure about the risks involved in derivatives trading. A Chartered Accountant by profession, Afzal is the 2022 USIC (United States Investment Championship) winner who earned this title by achieving 447% returns in stock trading. Having observed the financial markets and investment vehicles closely for several years, Afzal intends every retail investor to be aware of the risks associated with derivatives trading.

In January 2023, the Securities and Exchange Board of India (SEBI) published a study diving deep into the derivatives trading scenario and its outcomes for traders across the country. According to the study, while the market witnessed a 500% increase in the number of individual traders in the equity derivatives segment between FY19 and FY22, nine out of ten traders suffered losses.

Stocks and derivatives are two major trading vehicles preferred by Indians. While trading in stocks involves outright ownership of shares of a company), derivatives trading involves buying and selling financial contracts that derive their value from the underlying assets. Derivatives are prone to a high degree of leverage and volatility, making investments riskier. 

Backing SEBI’s study that discloses these risks and uncertainties, Afzal urges retail traders to be more mindful of the financial vehicles they choose. He also stresses the importance of being well-informed at all times. A major chunk of retail traders in India is blindly driven by the voracity of making more money, making them susceptible to risky choices. This makes ill-informed traders lose their precious savings through risky vehicles.

Afzal also sheds light on the money traders end up spending as transaction costs, adding insult to injury. Citing the report, he says, “The SEBI report shows that the loss-making traders expended an additional 28% of their losses in the form of transactional costs. Even in the case of traders making profits from derivatives, 15% to 50% of their gains went into paying transaction costs. This further increases the need for retail traders to be aware of the nitty-gritty details regarding the transactions they make.”

While a few derivatives traders did make profits between FY19 and FY22, they are significantly outnumbered by the loss-makers. The SEBI release claims, “Average absolute net loss of a loss-maker was over 15 times the net profit made by a profit-maker.” Considering this situation, the capital markets regulator has already announced new guidelines for additional risk disclosures brokers and exchanges will need to make to the investors before they trade.

Afzal believes that this initiative by SEBI is a much-needed wake-up call for retail traders across the country. He says, “Living in the age of information, we cannot afford to make ill-informed choices, especially when they put our hard-earned money at stake. SEBI’s recent study and its initiative to make traders more aware of the vehicles they choose is bound to prevent a plethora of traders from losing their savings and investing them wisely.”

In light of the new SEBI report, Afzal has been doing his best to spread awareness regarding the importance of informed trading and choosing the right trading vehicles across the country. He believes trading in equity stocks produces better outcomes for most traders as compared to derivatives.