Economic Survey warns stock market investors against derivatives trading: ‘Can make you feel cheated’

Derivatives trading appeals to the human instinct for gambling, the Survey said that the reality of it is starkly different from its promise.

Speculative trading has “no place in a developing country” such as India, the Economic Survey said as it criticized rising futures & options in the stock market by retail investors. The document warned investors that any potential fall in stock markets could make them feel cheated and deter them from returning to capital markets for a long time.

A bird flies past a screen displaying the Sensex results on the facade of the Bombay Stock Exchange (BSE) building in Mumbai. (Reuters)

Noting that derivatives trading appeals to the human instinct for gambling, the Survey said that the reality of it is starkly different from its promise. The Survey emphasized, “Globally, derivatives trading loses money for investors, for the most part. Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading.”

The risks associated with derivatives trading are not just theoretical, the Survey said, cautioning investors that a significant stock market correction can lead to substantial losses, particularly for retail investors which may result in the investors feeling “cheated by unseen more considerable forces.”

It said, "India needs to have an orderly and gradual evolution of the financial market. All stakeholders must ensure that capital markets play their theoretically assigned role of directing savings to their most productive investments. It is not just in the national interest. It is an act of self-interest, too."

This comes as Sebi chairperson Madhabi Puri Buch said that the worry for the markets regulator is not just from a “micro level” but also from a “macro level” of the F&O trading.