Post by Sapphire Capital on Jul 14, 2008 3:11:12 GMT 4
July 14, 2008
In what could possibly be a sign of the maturing of the equity derivatives market in India, retail investor participation is declining rapidly. This should come as no surprise, considering the downtrend in the stock market since the beginning of 2008.
Retail investors, considered to be the “weak hands” in the derivatives segment because of their limited capital base, were hit the hardest when stock prices plunged in January. According to market watchers, declining retail participation in the derivatives segment may not be a bad thing after all.
“Retail investors have limited knowledge of the futures and options market (F&O); they should be using it to hedge their portfolios instead of taking directional calls,” says a BSE broker.
In a hedging transaction, the investor may take up a position opposite to what he has taken in the cash market. This helps him limit losses, if his cash market bet goes wrong, but also limits the scope for profits. In a directional call — which is usually unhedged — the investor goes either long or short on stock or index futures, based on his perception of where the market is headed in the short term.
Till January, the market had been rising one way. So, it was easy to make money on directional calls by just going long on Nifty futures. But that is no longer the case. While the market has been on a downtrend, even bears have not been able to make money consistently due to sudden fluctuations on either sides, regularly.
Retail turnover in the NSE’s derivatives segment has been falling steadily for the past several months. For 2007, average monthly market share of retail investors was 63.5%. In 2008, the share has dipped from 62% in January to about 53% in June.
At the same time, market share of institutional investors has gone up from 11% to 15%, and that of proprietary traders has risen from 27% to 31% during the same period.
While some market watchers say retail investors should stick to products they understand better, liquidity in the F&O segment has dried up because of lack of retail participation. A section of brokers feels that the rapid expansion in the list of securities eligible for F&O trading is also to blame for retail apathy.
Trading volumes in many securities were quite low at the time of their introduction in the F&O list. When panic set, most retail investors had to cut their positions at huge losses.
In what could possibly be a sign of the maturing of the equity derivatives market in India, retail investor participation is declining rapidly. This should come as no surprise, considering the downtrend in the stock market since the beginning of 2008.
Retail investors, considered to be the “weak hands” in the derivatives segment because of their limited capital base, were hit the hardest when stock prices plunged in January. According to market watchers, declining retail participation in the derivatives segment may not be a bad thing after all.
“Retail investors have limited knowledge of the futures and options market (F&O); they should be using it to hedge their portfolios instead of taking directional calls,” says a BSE broker.
In a hedging transaction, the investor may take up a position opposite to what he has taken in the cash market. This helps him limit losses, if his cash market bet goes wrong, but also limits the scope for profits. In a directional call — which is usually unhedged — the investor goes either long or short on stock or index futures, based on his perception of where the market is headed in the short term.
Till January, the market had been rising one way. So, it was easy to make money on directional calls by just going long on Nifty futures. But that is no longer the case. While the market has been on a downtrend, even bears have not been able to make money consistently due to sudden fluctuations on either sides, regularly.
Retail turnover in the NSE’s derivatives segment has been falling steadily for the past several months. For 2007, average monthly market share of retail investors was 63.5%. In 2008, the share has dipped from 62% in January to about 53% in June.
At the same time, market share of institutional investors has gone up from 11% to 15%, and that of proprietary traders has risen from 27% to 31% during the same period.
While some market watchers say retail investors should stick to products they understand better, liquidity in the F&O segment has dried up because of lack of retail participation. A section of brokers feels that the rapid expansion in the list of securities eligible for F&O trading is also to blame for retail apathy.
Trading volumes in many securities were quite low at the time of their introduction in the F&O list. When panic set, most retail investors had to cut their positions at huge losses.