Equity Derivatives Activity in India Analyzed

Recent data from the National Stock Exchange (NSE) reveals a surprising picture of investor activity in India’s equity derivatives market. Just 1.8% of all registered investors have consistently traded exclusively in derivatives like futures and options (F&O) over the past 12 months. This highlights a significant disparity between the overall investor base and those deeply involved in this specific area.

Key Points

• Small portion of investors trade solely in derivatives (1.8%).
• Over 76% of all traders favor the cash market segment.
• High derivative trading leads to significant losses for most.
• Investor education and trust are major challenges for F&O.
• Regulatory changes impact participation levels dramatically.
• Cautious sentiment leads to reduced net investment flows.

Specifically, out of nearly 9 million individual investors actively using the equity derivatives segment, a relatively small group of 2.1 million were trading *only* in F&O contracts during this time. The vast majority – around 28.2 million of the total 37.2 million traders – were focused solely on the traditional cash market, where investors buy and sell stocks directly.

Interestingly, even those engaging in derivatives often participate in the cash market as well. A remarkable 77% of individuals trading in F&O also regularly trade in the cash market, demonstrating a preference for diversified strategies.

These figures challenge the common assumption that many retail investors are heavily involved in complex derivative products. The NSE report explicitly states this to dispel misunderstandings about market participation.

Furthermore, a Securities and Exchange Board of India (Sebi) survey confirms the low penetration of F&O, stating it’s currently below 1% across India. The key reasons given for this low uptake are a lack of trust and transparency, particularly surrounding complex products like derivatives. Many investors expect quick gains with small investments, a risky strategy in the volatile derivatives market.

It’s important to note that Sebi has previously reported that over 90% of retail traders in the derivatives market experience losses. This underscores the inherent risks associated with trading derivatives, especially for those without a deep understanding of the market.

Investor participation in equity derivatives has shown fluctuations. While numbers rose to 3.36 million in September from a low of 3.19 million in August, and a total of 6.2 million new investors were added during the first half of the current fiscal year, F&O participation has declined steadily since peaking at 5.26 million in June 2024. Regulatory measures implemented from November 2024, including larger contract sizes, restricted expiry dates, and increased margin requirements, significantly impacted participation.

Individual investors have become more cautious, pulling out a total of Rs 28,488 crore between March and June due to rising trade tariffs and geopolitical tensions. However, net investments reversed in the second quarter, reaching Rs 20,469 crore. Total net inflows for FY26 so far stand at Rs 7,332 crore, substantially lower than the Rs 57,089 crore recorded in the same period last year.

Investing in derivatives requires a thorough understanding of risk management and market dynamics.