The Realities of Stock Market Trading for Individual Traders

Understanding the High Transaction Costs and Limited Profit Opportunities

Discover the challenges faced by individual traders in the stock market, particularly in the equity futures and options segment. Learn about the staggering losses incurred by most traders and the impact of transaction costs on their profits. Explore the alternative funding source offered by the SME platform and the concerning trend of companies misleading investors post-listing. Understand SEBI's efforts to address these issues and ensure the transparency and fairness of the SME platform.

A study by the Securities and Exchange Board of India (SEBI) revealed a staggering 90% of individual traders within the equity futures and options segment have sustained net losses.

The losses incurred by these traders are not insignificant. On average, loss makers registered net trading losses close to ? 50,000. This amount can add up quickly, especially for traders who are actively trading.

In addition to the net trading losses incurred, loss makers also expended an additional 28% of net trading losses as transaction costs. These costs include brokerage fees, exchange fees, taxes, and other related expenses.?

In contrast, those making net trading profits incurred transaction costs ranging from 15% to 50% of their profits. This implies that these expenses eat up a sizable portion of their profits.

The stock market trading landscape is a competitive one, with many individual traders seeking to make a profit. However, the reality is that the majority of individual traders in the equity Futures and Options Segment end up incurring net losses.

The high transaction costs associated with stock market trading can make it difficult for individual traders to turn a profit. Even those who can make net trading profits might discover that transaction costs eat up a sizable portion of their earnings. This means that only a small minority of traders can consistently turn a profit.

This is why it is important for traders to carefully consider the transaction costs associated with their trading before they enter the market. Understanding the costs involved is crucial for traders to make informed decisions about their trading strategies and risk management.

The Small and Medium Enterprises (SME) platform of the Stock Exchanges was operationalised in 2012 to provide an alternative source of fundraising for emerging businesses. Since its inception, there has been a significant increase in the number of SME issues and investor participation in such offerings. Over the past ten years, more than ?1.40,000 million has been raised through this platform, with around ?60,000 million raised during FY '24.

Following their listing, SEBI has observed a troubling trend. It has come to their attention that certain SME companies and/or their promoters have been engaging in practices that paint an unrealistic picture of their operations. These companies have been found to make public announcements that portray an overly optimistic view of their operations. Subsequently, they often follow up these announcements with various corporate actions such as bonus issues, stock splits, preferential allotments, and so on.

This behaviour goes against the principles of entrepreneurship, as it does not align with the ideals of value addition, innovation, and creativity.

These actions create a positive sentiment among investors, which induces them to purchase such securities. Simultaneously, this also presents an easy opportunity for the promoters to offload their holdings in such companies at elevated prices.

In the recent past, SEBI has passed orders against such entities, which are available on the SEBI website. It can be seen that the modus operandi of these entities follows a pattern that is by and large similar to what has been mentioned above.

Vedanta Case Study.

For instance, the promoters of Vedanta Limited, a diversified natural resources company, have pledged fifty per cent of their holdings.?

A recently published news article reports that Vedanta has pledged an investment of approximately ?1 trillion in Rajasthan, primarily directed towards the development of renewable energy projects. Vedanta also intends to establish a state-of-the-art camel rehabilitation and conservation park in Barmer.

Vedanta maintains a diverse portfolio of assets across numerous sectors. These sectors include metals and minerals such as zinc, silver, lead, aluminium, chromium, copper, and nickel; oil and gas; ferrous materials like iron ore and steel; and power, including coal and renewable energy. As part of its growth strategy, the conglomerate is also venturing into new areas, such as semiconductor and display glass manufacturing.

In 2023, Vedanta announced the creation of independent verticals through the demerger of its underlying companies, primarily in the metals, power, aluminium, and oil and gas sectors. This strategic move aims to unlock potential value by establishing six separate listed entities: Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals, and Vedanta Limited.

Vedanta Limited has its promoters pledge 50% of their holdings as collateral to secure loans or meet other financial obligations. This strategic move apparently demonstrates the promoters' confidence in the company's long-term growth prospects and their commitment to ensuring its financial stability.

Vedanta has made a significant investment of approximately Rs 1 trillion in Rajasthan towards development, including a large-scale renewable power initiative; its directors often interact with the Chief Minister.?

This investment aligns with Vedanta's broader sustainability goals and its commitment to transition towards cleaner energy sources. Some of Vedanta's businesses, Hindustan Zinc and Cairn India are in Rajasthan and have invested more than ?1 trillion over the last few years.

Vedanta intends to take advantage of Rajasthan's plentiful solar and wind resources by funding renewable energy projects in the region. In addition to helping India meet its renewable energy goals, this investment boosts regional economic growth and generates job opportunities.

Building solar parks, wind farms, and related infrastructure is a necessary step in the development of various renewable energy projects. Vedanta will work with stakeholders and local people to ensure that the project is implemented responsibly and sustainably, minimising any potential negative effects on the environment or society.

Vedanta is significantly contributing to India's energy transformation and reinforcing the nation's commitment to clean and sustainable energy sources through its investment in Rajasthan. The company's pledge is expected to improve India's energy mix's overall sustainability, promote energy security, and reduce carbon emissions.

SEBI’s note.

SEBI has taken note of this trend and has issued several circulars and guidelines to address this issue. When you try to invest in Vedanta Limited, SEBI will prompt a word of caution. These guidelines aim to ensure that companies provide accurate and transparent information to investors and that corporate actions are undertaken fairly and equitably.

SEBI's actions have helped to improve the functioning of the SME platform and protect investors' interests. Nevertheless, further efforts are required to ensure that the SME platform continues to function as a viable funding source for emerging businesses.

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