What The Retail Investor Must Know

Many are attracted by the potential for large gains, but don't necessarily seem to understand that a single trade gone wrong can wipe out their accumulated profits.

The top 1 per cent tax filers in terms of gross income, or about 50,000 individuals, accounted for over 54 per cent of short-term capital gains (STCG) reported for the assessment year 2023-2024 (AY24).

However, the same group took home just 16.1 per cent of the total earnings, reflecting a lopsided trend in individual income and STCG, according to a Business Standard analysis of income tax data for AY24.

STCG refers to gains from securities, gold, property and other assets held for less than a year.

The tax data does not provide a break-up of gains specifically from the stock market, but trends can be considered broadly indicative.

The number of individuals reporting STCG has risen over tenfold from 0.43 million in AY13 to 4.58 million in AY24 amid surging participation in the stock market.

The Securities and Exchange Board of India has been warning investors of the perils of stock market speculation, citing losses that many have faced.

In a report released on September 23, Sebi pointed out that 91.1 per cent of traders lost money in the futures and options segment in the financial year 2023-24.

While 4.58 million people reported STCG in AY24, the National Securities Depository Limited (NSDL) has reported over 30 million investor accounts, and the Central Depository Services (India) Limited (CDSL) nearly three times that figure.

People at the top of the pyramid made significantly more money than those at the bottom.

For example, those who reported STCG of over Rs 1 crore (Rs 10 million) made average gains of Rs 3.8 crore (Rs 38 million) in AY24.

One single individual reported Rs 880.41 crore (Rs 8.8041 billion) in STCG for the year.

In contrast, the average gain for everyone else was Rs 70,000.

This only includes those who reported non-zero STCG.

A vast majority (around 71 million filers) reported zero gains.

The average gains of everyone outside the crorepati club were at their lowest in at least 12 years, according to data going back to 2012-2013.

The average retail investor may be outgunned when it comes to speculative activity where positions are held for less than a day, suggested one provider of sophisticated trading software who preferred anonymity because of the sensitivity of the issue.

Institutions and the very wealthy can spend crores to execute trades faster using algorithms and money that the average retail investor cannot do.

You may not have advanced tools, said the person, who likened the difference to driving a regular vehicle versus a premium sports car.

Such positions, which are taken and closed out within the same session, often in minutes or fractions of a second, are declared as business income rather than short-term capital gains.

Futures and options also fall under business income.

Many are attracted by the potential for large gains, but don't necessarily seem to understand that a single trade gone wrong can wipe out their accumulated profits, pointed out Suresh Sadagopan, founder, Ladder7 Financial Advisories.

He has been advising clients against excessive risk-taking in derivatives, likening such activities to speculation and gambling.

The house always makes money it is set up against you, he said.

Feature Presentation: Aslam Hunani/Rediff.com