A staggering 70% (7 out of 10) day traders in the Indian stock market lose money, reveals a ground-breaking study by regulator Securities and Exchange Board of India (SEBI). This is significant, especially considering the 300% surge in day trading activity between FY 2018-19 and FY 2022-23.
The study, which focused on individual traders in the equity cash segment, found that young traders (under 30) are particularly prone to losses, with 76% of them ending up in the red. Frequent traders, those who execute over 500 trades annually, face an even higher loss rate of 80%.
Growing Trend
The SEBI study has shed light on the growing trend of day trading among retail investors in India's equity cash segment. The analysis, which included data from FY19, FY22, and FY23, reveals a significant increase in the number of individuals participating in intraday trading, rising 4.6 times from 15 lakh in FY19 to 69 lakh in FY23. This surge has been accompanied by a demographic shift, with younger traders and those from Tier-II and Tier-III cities increasingly entering the market.
Interestingly, the study found that loss-making traders tend to trade more frequently than profitable ones. This suggests that chasing losses and overtrading could be contributing factors to their lack of success. Additionally, loss-making traders incur substantial trading costs, further eroding their capital.
Profitability Concerns
The study's findings raise concerns about the profitability of day trading for retail investors. The analysis of trading patterns reveals a stark contrast between small and large traders.
The bottom 78% of traders, based on annual turnover, contributed to less than 1% of the total intraday turnover in FY23, while the top 6% of traders accounted for over 90% of the turnover. This skewed distribution highlights the dominance of a few large players in the market.
At a gender level, ‘Female’ traders had a lower proportion of loss-makers than ‘Male’ traders across the years. Average profit by profit-makers as well as Average loss by loss-makers was higher for ‘Female’ traders as compared to ‘Male’ traders.
Impact of Costs
Even among traders with substantial turnover exceeding Rs. 1 crore annually, 76% experienced losses in FY23, with an average loss of Rs. 34,977. For such traders’ group, the average profit by profitmakers was Rs. 89,172 while the average loss by loss-makers was Rs. 74,575 during FY23. Average number of trades by loss-makers was higher than the profit-makers. This data underscores the challenges and risks associated with day trading, even for those with considerable capital.
The impact of trading costs on profitability was also notable. Loss-making traders saw their losses exacerbated by 57% due to trading costs in FY23. In contrast, profit-making traders incurred 19% of their profits as trading costs. These figures emphasize the importance of factoring in trading costs when assessing potential returns.
Cautionary Findings
The SEBI study's findings paint a cautionary picture of day trading in India. While the allure of quick profits may attract retail investors, the data reveals a harsh reality of high loss rates and the dominance of a few large players. These findings underscore the inherent risks of day trading, which often leads to impulsive decisions and excessive trading, resulting in significant losses for many investors.
For most investors, a more prudent approach involves investing in diversified portfolios through investment vehicles managed by seasoned professionals. These professionals possess the expertise and experience to navigate the market's complexities, potentially offering investors a more stable and profitable path to wealth creation.
You can access the detailed study findings here.
