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By Dhirendra Kumar, CEO, Value Research It's an old saying that in a gold rush, the miners may or may not make money, but those who sell them the picks and shovels get rich. This is certainly true of parts of the stock markets , especially short-term trading by individuals.
The other day , while reading the story of Nitin Kamath , the man who has set up Zerodha, India's first and largest discount stock broker , I was struck by the fact he is one of those who has gone over from being a gold digger to a seller of picks and shovels.
As narrated by Kamath himself, he was trading on the markets since he was 17 years old. However, after receiving two big shocks on the markets, one during the dotcom crash and the second in , he apparently decided to switch from digging to providing shovels to others.
There's more than a little irony in this story - a man loses big on the markets and decides to get out of trading and creates a business which will help others do the same. However, it perfectly encompasses the experience of practically a good proportion of individual traders on the Indian equity markets, the negative impact being specially amplified by the fact that their activity of choice is highly leveraged derivative trading.
Typically, they make profits for short runs and then make large losses, all amplified by the lever aged nature of their trading. In fact, it is interesting to see that there is a competition called 'The day challenge' on the Zerodha website, which customers can participate in. All it takes to win this challenge is to not make a loss over 60 days.
If you come out profitable any profit at all at the end of the 60 days, then you've done it --you've cracked the challenge. To the uninitiated like me, this appears to be an astonishingly low qualifying level for an activity whose only goal is supposed to be to earn money, but then I suppose that it must be rare n achievement.
As it happens, Sebi is reportedly trying to limit derivative trading among individual traders. A few days back, there was a report in this newspaper about the Sebi planning to increase the contract size in futures and options trading on the stock exchanges.
For the last 15 years, the contract size has been Rs 2 lakh. Reportedly, Sebi now wants it increased to Rs 10 lakh. And why would Sebi want to do that? Clearly, an overwhelming number of individual traders are regularly losing their shirts in derivatives trading. As the logic of trying to limit trading to those who can afford trade with larger amounts, I'm sure it isn't because they are better at making money.
Instead, it is the traditional idea that it's OK if richer people lose money on the markets but the small investor must be kept away from risky activities. Maybe there really is something to this line of thinking. Obviously , brokers and stock exchanges are strongly opposed to what Sebi has proposed as it means lower revenue and profits or them although their official reasons talk about market liquidity etc.
Of course, derivatives which are generally called deffendo in India, which makes them sound like a magic spell from the Harry Potter books have no inherent connection to discount broking.
Discount brokers like Zerodha and now others too charge Rs 20 per trade instead of the traditional percent brokerage. If someone is offering lower cost for the service, then that's fine. If the discounters are doing well, then traders must be finding their barebones services to be good value. It's the larger question of what role derivatives are playing in the Indian markets, that's the real concern.
Read more on stock markets. What do you do when your SME is not making money? Sebi framing algo trading rules for retail investors. My Saved Articles Sign in Sign up. Find this comment offensive?
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