SEBI set to tighten regulations on F&O trading

In the rush to become rich quickly, lakhs of people invest in the derivatives segment, i.e, futures & options. This way they end up losing their hard-earned money. The majority of these losers are retail investors, that is, small investors. In reality, F&O trading is like navigating through a river of fire— not everyone can cross it. It requires seasoned players in the market. Hence, retail investors are often advised to stay away from futures and options trading. Despite this, there are people who don’t believe it.

SEBI is planning to tighten regulations on F&O trading to curb trading by small investors. Let’s find out how strict these regulations could be.

SEBI and RBI are closely monitoring the pace of trading in futures and options segment. RBI Governor Shaktikanta Das says that SEBI is fully aware of the matter. If required, necessary steps will be taken by SEBI, he said. In fact, market regulator SEBI is concerned about the increasing interest of retail investors in the F&O business.

The regulator may soon tighten the rules for F&O trading. New rules may include increasing margins, tightening eligibility criteria and providing more details related to investors’ net worth. These rules are aimed at curbing reckless trading in F&O.

The equity market has two segments, i.e, cash segment and derivatives segment. The derivatives segment is also known as futures and options or F&O segment. In F&O trading, deals are made based on underlying assets such as stocks or commodities, deriving their value from them.

Under futures contracts, buyers and sellers are need to buy or sell a share at a predetermined price and date. Similarly, under options contracts, customers have the right to buy or sell a share at a fixed price for times to come. Although they are not obligated to do so on that date.

There is hope for significant profits in the futures and options segment. This is why retail investors invest their money. However, such trading involves higher risks. A SEBI report indicates that 89% of individual traders incurred losses in the equity futures and options segment. This means only one out of ten people made money.

Moreover, the share of young investors, aged 20 to 30, increased from about 11% to 35% in  in equity F&O trading in 2018-19. This is not the first time futures and options trading is termed risky for retail investors.

Previously, SEBI and even Finance Minister Nirmala Sitharaman expressed concerns about the increasing participation of retail investors in F&O. She said that the rampant rise in the stock market and household finance poses a risk in the F&O segment. Retail investors were also advised to stay away from F&O trading.

National Stock Exchange (NSE) Chief Ashishkumar Chauhan last week had said that the F&O segment is not for retail investors. It is for those investors who have good knowledge and can manage market risks better. He said that retail investors should focus on investing in equities through mutual funds.

Therefore, don’t jump into F&O trading in pursuit of making more money or getting rich quickly. It can sink your money and can burden you with debt. It can even harm your personal budget. There’s also a lure on social media to learn F&O trading courses for making money.

Don’t fall for these traps. Most of these influencers are just trying to recover their losses by charging you for courses in the name of learning.