INSUBCONTINENT EXCLUSIVE:
By Dhirendra KumarSebi will allow stock exchanges to extend derivative trading hours to 11.55 pm from October
At present, derivatives are traded till 3.30 pm.
This is good news for stock exchanges
Longer trading hours will mean more trading
Given that more than 90% of the trading volume is algorithmic trading of derivatives, it’s possible that the volume of trading will rise
almost in proportion to the increase of hours
That would be a windfall for the stock exchanges.
However, for individual investors, this is bad news
The average Indian saver places all his or her money in deposits with banks or post offices or the government
A small proportion invests in equity funds
The starter investment is often a tax-saving fund
As ELSS investments come with a lockin, and investors have to stay put for three years
This is a reasonably long period to see good gains
For most investors, the idea that equity funds can get you good returns becomes obvious.
A certain proportion of investors go beyond this
stage—and generally with the help of what I would call equity investment’s equivalent of a drug dealer
This person often goes by the name of a wealth manager or a relationship manager and is generally employed by a bank or a stockbroker
His job is to get you hooked and take as much of your money as possible
His logic is simple: why are you wasting your time As you already know that equity returns are good, he would like to introduce you to the
form of equity that he says can get you the highest possible returns, which is ‘effendo’.
Effendo sounds like a magical spell but is
actually the popular way to pronounce FO, or futures and options, or derivatives
Effendo is like the Harry Potter spell called Evanesco, which makes things vanish
Effendo can make money vanish, as it does for investors lured into derivatives trading.
I understand the official story about
derivatives—they provide depth and breadth to the stock markets etc etc
However, for a vast majority of small investors, this is rubbish
Instead, in the words of Warren Buffett, they are financial weapons of mass destruction.
Derivatives can be used by traders to protect
against risk, acting like an insurance policy
However, they can also be used to enhance risk and returns, effectively as an instrument that offers a chance of higher gains, but also a
high risk of huge losses.
The problem is not that using futures and options in this manner is possible, but that almost every part of the
retail equities trading industry is dedicated to getting customers into this kind of trading
Practically every broker does this and all the stock exchanges have spared no effort in getting as many people to trade as speculatively as
Now, the exchanges have prevailed upon Sebi to allow a huge expansion of this activity
This kind of institutional behaviour is disappointing, but not surprising.
Savers who understand this should save themselves from this kind
There will be many people who will try and tell you stories to earn fat commissions out of your money, but it’s your job to save
yourself.
(The author is the Founder and CEO of Value Research)
