There was an exponential increase in the F&O segment participation during the pandemic, with the total number of unique individual traders increasing by over 500% from 7.1 lakh in FY19 to 45.24 lakh in FY21

Keeping Tabs On Speculation:

• STT on options sale rose from 0.0625% to 0.1% of premium
• STT hiked futures sale from 0.0125% to 0.02%
• FM says speculative trade has no place in a developing country
• Most retail investors losing money in F&O
• Sebi revealed that 89% of individual traders suffered with average losses of Rs1.1 lakh

New Delhi: Finance Minister Nirmala Sithraman on Tuesday proposed to increase the rate of securities transaction tax (STT) on futures and options (F&O) trade to discourage retail investors’ participation in the risky instrument.

“It is proposed to increase the rates of STT on the sale of an option in securities from 0.0625 per cent to 0.1 per cent of the option premium, and on sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such futures are traded,” she said in the Union Budget speech.

This came after the Economic Survey flagged concerns over rising retail investors’ interest in derivatives trading. The survey stated that speculative trade has no place in a developing country. It also pointed out that the sharp increase in retail investor participation in F&O trading is likely driven by humans’ gambling instincts.

“Derivatives trading holds the potential for outsized gains. Thus, it caters to humans’ gambling instincts and can augment income if profitable. These considerations are likely driving active retail participation in derivatives trading,” according to the Economic Survey 2023-24.

Recently, Sebi chief Madhabi Puri Buch also cautioned investors against heavy bets on F&O. Before that, Sitharaman and chief economic adviser V Anantha Nageswaran flagged the growing risk of F&O trading for retail investors.

F&O trading continues to grow in popularity, and market experts believe that this is driven by the potential for profit and the rising trading volumes. Experts said investors who lack understanding or risk appetite should avoid derivatives trading.

The segment’s popularity is evident from its massive growth, with the monthly turnover in the F&O segment reaching Rs 8,740 lakh crore in March 2024, compared to Rs217 lakh crore in March 2019.

At the same time, the average daily turnover in the equity cash segment was Rs1 lakh crore, while the F&O segment saw an average daily turnover of about Rs330 lakh crore. Futures and Options trading involves contracts that derive their value from an underlying asset, such as stocks or commodities. Futures contracts obligate the buyer and seller to transact at a predetermined future date and price, while options give the holder the right, but not the obligation, to buy or sell the asset at a set price within a specific period. These financial instruments are used for hedging risks, speculating on price movements, and arbitraging price differences.