Challenges New Traders Face in Equity Derivatives

e-ISSN: 2582-5208
International Research Journal of Modernization in Engineering Technology and Science

( Peer-Reviewed, Open Access, Fully Refereed International Journal )
Volume:05/Issue:02/February-2023 Impact Factor- 6.752 www.irjmets.com
A STUDY ON EQUITY DERIVATIVES AND CHALLENGES FACED

BY NEW TRADERS
Tanvir Belim*1, Smit Soni*2, Prof. Sonakshi Sharma*3
*1,2Student, Faculty Of Management Studies, Parul University, Gujrat, India.
*3Guide, Faculty Of Management Studies, Parul University, Gujrat, India.
DOI : https://www.doi.org/10.56726/IRJMETS33671
ABSTRACT
Derivative market plays an important role in the economic development of the country. In this paper we are
taking a study on challenges faced by new traders in equity derivatives. There were several studies conducted
on equity derivatives. Here we are focusing on challenges faced by new traders and possible outcomes.
Currently, derivatives have become increasingly popular after COVID-19 pandemic. This has grown with an
extraordinary speed across India and now it can be called as the derivatives resolution. For this research, we
collected primary as well as secondary data and point out the current scenario. This study enables us to get a
clear overview of derivatives market in India. This research gave the new information recent trends.
Keywords: Derivatives, Option, Challenges, Financial Market, India.
I. INTRODUCTION
The investment industry exists to serve its clients. His two main groups of clients are investors and issuers.
Investors are individuals, charities, corporations, banks, collective investment schemes such as pension and
insurance funds, central and local governments, or “supranational institutions” such as the World Bank. The
investment environment is highly dynamic and constantly evolving. But those who take the time to understand
the basic principles and different asset classes will win out in the long run. The first step is learning to
distinguish between different types of investments and where they are on the risk ladder. The investor then has
an investment objective consisting of increasing assets (capital growth) or generating income. Some investors
have only one of these goals, others have both. For example, high-income individuals are likely to have all the
income they need from employment and want to invest extra cash to generate capital appreciation. However,
charities may require the maximum income they can generate from their investments to fund their activities.
Derivative market
Derivatives are one of the most versatile instruments. The word result comes from the word derived. Indicates
that there are no independent values. A product is a contract whose value is derived from the value of another
asset, called an underlying asset, which may be a stock, stock market index, interest rate, commodity, or
currency. Underlying is the identifier of the derivative contract. If the price of the underlying asset changes, the
value of the derivative will also change. Derivatives are meaningless without an underlying asset. For example,
the value of a gold futures contract is derived from the value of the underlying asset. In this example, H. Gold's
off-derivative market price is determined by the spot or spot market price of the underlying gold. The primary
purpose of these tools is to commit prices to future data to reduce the level of financial risk and to provide
protection against future adverse price movements.
II. REVIEW OF LITERATURE
The researcher went through various literatures available on this subject. Numerous books, reports, news
articles, research articles and studies were thoroughly studied. Context to some of the books, articles read and
various websites visited is given below:
Prof. J R Varma Committee Report, submitted to SEBI in October 1998. The Committee was appointed by
SEBI to recommend measures for risk containment in derivatives market in India. The committee enumerated
the risk containment issues that assume importance in the Indian context such as estimation of volatility,
calendar spreads, trader net-worth, margin collection and enforcement, Clearing Corporation, position limits,
legal issues etc. These recommendations were adopted by SEBI to govern the risk management framework for
derivatives market in India.
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Gulliksson, M., & Mazur, S. (2020) studied portfolio construction with a single covariance matrix. Study
explored convergence properties gives a solution as better than the solutions that are based on constrained
least norm Moore–Penrose, Lasso, and naive equal-weighted approaches. It confirms that the optimal portfolio
weights that are obtained by DFPM and Moore–Penrose inverse methods can be modelled by white noise
process.
Basha, S. M., & Ramaratnam, M. S. (2017) analyzed nifty midcap 150 stocks for optimal portfolio construction
from 2011 to 2016. Sharpe single index model applied to find out excess return to beta and calculation of cut-
off point. Study confirms that the 150 stocks of midcap only 25 scripts covered in final portfolio. It’s found that
pharma stocks weightage will be more than the other sectors stocks.
Basanna, P., & Konnur, N. P. (2019) Study undertaken to construct optimal portfolio using Sharpe single
index with Nifty 50 index. For construction portfolio daily closing prices took from the period of four year i.e.,
2014 to 2019. It is found that stocks selected for optimal portfolio is consumer non-durables (3 stocks),
consumer durables (1 stock), and finance (3 stocks) and agree based sectors (1 stock)
Greeshma Francis (2019) had done a study on emerging trends in Indian Derivative Market. Through that
researcher attempted to analyse different kinds of derivative market and its recent developments in the Indian
commodity market.
Ms. Shalini H S, Dr. Raveendra P V (2014) had studied many aspects of the Indian derivatives market as well
as the Global derivatives. Such as scope, concept, types, history, regulations, market, trend, growth and its
future. They also study the challenges and status of Indian derivative market as well as Global derivative
market.
Dr. Y. Nagaraju (2014) studied investors’ perception towards the derivative market and instruments. He
found that the main reason for not investing in derivatives are lack of knowledge and complexity of the nature
of instrument.
Suresh narayanarao (2013) his studies conducted to establish the framework to understand the relation in
performance of the derivatives of BSE and NSE in India. It also helps to analyse the relationship between cash
market and the market volatility.
Neel Kamal Purohit (2013) his research were resulted that income of investors have a great impact on
frequency of trading in stock market.
Sahoo (2012) reveals that the legal framework for the derivatives trading is very important in the regulatory
framework for the derivative market. He also suggest that the aim of regulation should encourage the efficiency
and competition.
Shanmnga Sundaram V (2011) stated in his study that different dimensions of the investors’ behaviour
influence the investors’ decision making. He also examined the impact of the behaviour dimensions in capital
market.
Reddy and Sebastian (2008) studied the temporal relationship between the equities market and the
derivatives market. He also examined the price innovations appeared in derivative market and equity market.
III. PROBLEM STATEMENT
The researcher had started the study keeping in mind the following problems.
• India's derivatives market is growing strongly, but more needs to be done to increase participation in equity
derivatives trading, including educating the general public.
• Many investors do not participate in the derivatives market due to the lack of delivery-based settlement. This
could also lead to another type of product being offered to the broader market in the equity derivatives market.
• The physical/cash market structure is critical to the development of an efficient futures market. Many listed
securities are not traded on the equity derivatives market. This is because the index itself is made up of a small
number of these frequently traded indices, primarily used to hedge seven positions taken in equities other than
those available in the equity derivatives market. , index concentration and volatility can be high.
• The trading basket should be expanded to provide investors with a variety of opportunities to invest and/or
trade in the equity derivatives market.

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IV. OBJECTIVE OF THE STUDY
 To have an overview of Equity derivatives market in India
 To study the emerging trends in derivatives market in India.
 To probe into the problems of derivatives market due to Government policies.
 To study problems faced by Traders, intermediaries in equity derivatives market.
Hypothesis:
1. There is a relation in the performance of Index and Stock Futures and Options of NSE and BSE.
2. Derivatives turnover influences the turnover in the Cash and Volatility segment of Indian Market.
3. Indian derivatives market growth trend is in line with the global exchanges.
4. After the market crash in 2020 due to COVID-19 Pandemic, there is a slow and steady shift in preference of
the investors to Stock Index Options from other products that were preferred earlier.
5. There are a large number of investors who do not invest in the equity derivatives market due to lack of
knowledge of derivatives.
V. RESEARCH METHODOLOGY
The data for the study of derivatives market in India has been collected from both, the primary source and the
secondary source. In the first stage the data was collected from published work of National Stock Exchange
(NSE), Bombay Stock Exchange (BSE) and Securities and Exchange Board of India (SEBI) and other data
available in the libraries, books and journals, and on the internet. In the second stage, the primary data was
collected by way of designing questionnaires for investors and intermediaries.
5.1 Population:
In this study, entire set of traders are Considered as population size of this research. New traders, who have
entered in the market within 1 year to 3 year are involves in this study and major challenges faced by them is
focused.
5.2 Sample Method:
We have taken sample of 300 traders, who recently entered into the stock market for derivatives trading like
future and options. We floated a questionnaire which contains the questions regarding the characteristics of
traders, risk capacity, medium of trading, etc. In this research, we have used simple random sampling method
for study the issues and challenges faced by new traders.
VI. DATA ANALYSIS AND INTERPRETATION
6.1 Age of Respondents
13%
21-30
52% 31-45
35%
45 Above
Source: Primary Survey, 2022

We have taken 300 responses randomly from people. Responses are divided into three age groups, from where
it was observed that the age group of 21-30 years were largely taken as a sample size. In this age group, new
traders enter into the market. Some of them left after incurring frequent losses, while some of them learn and
trade frequently and make good amount of profit.

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6.2 Income status of respondent
8% 0-30000
39% 26% 30000-50000
50000-100000
100000 Above
27%

Responses are divided into four income groups. It was observed 39%people, whose have income of more than
100000 Rs. actively involve in frequent trading.Similarly27% people, whose income varies between 50000-
100000 involve in active trading. Here we observed that only 8% people whose income is less than 30000 are
actively trading. The main problem of new traders is proper budgeting. People are actively engaging trades
without measuring risk appetites. So on the basis of income people should start trading.
6.3 Types of traders
10% Intraday Trader

15% Arbitrage trader
6% Day trader
69%
Speculators

From this analysis, it was observed that there is a huge group of traders with 69%, who involve in intraday
trading. Other categories of traders are Arbitrage traders, Day Traders and Speculators. There are 15% traders
who involve in Day trading. There are 10% traders who involve in the group of speculators and there are very
few traders, whose involve in Arbitrage trading with having 6%. At the initial stage, a trader should focus on
more and more speculating to track the market. A trader should only does paper trading by testing different
chart patterns because this is one of the main reason for which traders book losses.
6.4 Platform they are using for trading
Zerodha
Upstock
9%
4% 28%
7% Angle Broking
5% 5 paisa
10%
Sherkhan
12% 25%
Motilal Oswal
Choice broking

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Mainly two types of brokers are there in the stock market.
1) Traditional Brokers: A traditional broker provides a large variety of services to its clients - such as
trading (stocks, commodities, and currency), advisory, research, asset management and retirement
planning. A traditional broker usually allows trading of different financial instruments - forex, mutual
funds, pension plans, insurances, bonds, IPOs and FDs.
Traditional brokers come with a steep operating rate, due to these extra facilities. The commissions
charged by them are significantly higher than discount brokerages. This could eat up your profits in the
long run, especially if you trade multiple times during a short time frame. If your budget for brokerage is
high and you have the resources to find someone to take care of your money and investments, a
traditional or full-service broker might be a right choice for you.
2) Discounted Brokers: On the other end of the spectrum, a discount broker offers essential services - like
carrying out buy and sell orders. At the same time, their low operating costs enable them to divert
resources to their technology. This translates into fast, smart and cutting -edge technology available for a
low cost to the trader. The cost of full-time advisory services and investment ideas is non-existent. Instead,
they spend on software enhancements to provide real-time data on different platforms such as desktop,
web and even mobile.
From the above analysis of data, it was observed that 28% traders use Zerodha as a broker for trading then
Upstock as a trading platform for trading. There are few brokers who uses the services of traditional brokers
like Sherkhan, Motilal oswal financial services, choice equity broking, etc.
A trader should wisely select broker at the initial stage of trading because there is major differences in terms of
charges and services. Major difference between traditional brokers and discounted brokers is mentioned in
above table.

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6.5 Investors risk taking ability
12%
High Risk
Moderate Risk
33% 55%
Low Risk

More investors are interested to take high risk as no one wants to take low returns. High percentage is
observed in case of High risk 55 per cent. For moderate and low risk only 33 percent and 12 per cent is
observed. High risk will lead to high profit. Since at earlier stages due to lack of awareness or any other reasons
traders make heavy losses.
So, at initial stage traders should focus on leaning the different kinds of trading patterns and techniques.
6.6 Trading Instrument
22% 24% Nifty 50

BankNifty
Stocks
19%
35% Other Instruments

From the collected data, it was observed that majority traders are involved in trading Bank nifty, which is an
index of banks. After Bank nifty, majority traders are involved in Nifty 50. For Stocks and other instruments are
19 per cent and 22 per cent.
There is option chain for Stocks and Indices, which describes the call option And Put option through which
traders can do analysis for trade.
6.7 Technical charts and indicators
Own Research
29% 27%
Business news
Broker's Advice
9%
35% Other
Source: Primary survey, 2022

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From the collected data, it observed that 27 per cent of traders are doing their own research to trade in the
market. While 35 per cent traders trade through business news. There are only 9 per cent of traders are doing
trade through Broker’s advice.
At the Initial stage traders are using other sources like telegram links, WhatsApp groups and unauthorized
traders advise. There is many authenticated software through which trader can learn to analyse the charts and
patterns.
There are few examples of charts-patterns which can be used to analyse the price movement of stock.
6.8 Investors behaviour towards online trading:

While analysing the future prospects of online stock trading among different investors, it observed that the
investors believe that in future the online trading will become trustworthy, it will reduce the transaction cost
and will provide opportunities at large scale for investment.
It was also observed that unable to trade (can log in but can’t trade), wait and watch attitude and risk of system
failure were the key areas in which the respondents were highly concerned i.e. safety issues on discount
brokers.
VII. RESULTS AND FINDINGS
 From the study of conditional volatility in stock future prices, it is observed that the existence of conditional
volatility is significant across all the sampled stocks.
 It is also observed that the conditional volatility is persistent for all the stock futures.
 The result of the study indicates that the retail investor trades significantly affect the price volatility of stock
futures.
 Further it is identified that the price volatility decreases with the increased retail investor participation and
vice versa.
 The study identified that, the NSE equity and equity derivative trade volumes are co-integrated and they
have long run relationship.
 It is found that trading by all investors at NSE F&O market jointly affects trade volumes at equity market.
 From the analysis we identified that institutional investor trades (Both FII and DII) at NSE equity derivative
market are significant in causing trades in equity market.
 FII and DII trade volumes at NSE F&O market have more power in explaining variance in spot market trade
volumes.
 It is found that trades through stock and index futures have high impact on equity market trade volumes.
 From the study of speculation at NSE equity derivative segment it is identified that speculation in option
products i.e., stock options and index options is higher than the future products.

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VIII. CONCLUSION
The study concluded that there are significant differences in how BSE and NSE operate in relation to
derivatives. This is reflected in the trading volume and the number of contracts traded. Although the Indian
derivatives market has seen tremendous growth, it has yet to keep pace with the global derivatives market.
Given many of the current changes, the Indian derivatives market is poised to continue growing and maturing
to enable greater participation in various asset classes by a wide range of participants.
The futures market in India has ample room for growth and is showing signs of doing so across global
platforms. Strict regulation strengthens our financial structure and deepens our knowledge of the derivatives
market, increasing investor confidence in the market and increasing derivatives trading for hedging purposes.
This is why the derivatives market exists. Single Options, Currency Derivatives, Interest Rate Derivatives and
Credit Derivatives are all in the growth stage of the Indian derivatives market and hence there is an opportunity
to further explore its growth compared to the global market.
IX. REFERENCES
[1] National Stock Exchange of India (2011) Derivatives Market – ISMR.
[2] Dheer, Mukta -Derivative Market- India.
[3] Sarang, Mani (2010) - Indian Derivative Market.
[4] Suchismita Bose (Jan.–June -06) - Indian Derivatives Market.
[5] Sasidharan, .K & Mathews, Alex K. - A Study on Indian Derivatives Market Opportunities and
Challenges.
[6] Kapadia, Riddhi (2006) - A Study on Derivatives Market in India: Current Scenario and Future Trends.
[7] Bhole, L.M (1999). – “Financial Institutions and Markets” Tata McGraw Hill Publishing.
[8] Gupta, S.L. (2011). “Financial Derivatives- Theory, Concepts and Problems”, Wiley India.
[9] Parusharam, N.R. (2009). “Fundamentals of Financial Derivatives”, PHI Learning Private Limited.
[10] Asani Sarkar (2006), ‘Indian Derivatives Market’, New Delhi, Oxford University press.
[11] Sunil Parameswaran, (2005), 'Futures Markets: Theory and Practice, 1st Edition’, Tata McGraw Hill.
[12] V Raghunathan, (2010), ‘Stock Exchanges, Investments and Derivatives, 3rd Edition’, Tata McGraw Hill.
[13] PatwariD.C. and Bhargava A. (2006) Options and Futures an Indian Perspective, Jaico Publishing,
Mumbai.
[14] “Regulatory Framework for Financial Derivatives in India” by Dr.L.C.Gupta.
[15] Ms. Shalini HS, Dr. Raveendra PV. A Study of Derivatives Market in India and its Current Position in
Global Financial Derivatives Markets. Journal of Economics and Finance. 2014.

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Challenges New Traders Face in Equity Derivatives

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e-ISSN: 2582-5208

International Research Journal of Modernization in Engineering Technology and Science

A STUDY ON EQUITY DERIVATIVES AND CHALLENGES FACED

www.irjmets.com @International Research Journal of Modernization in Engineering, Technology and Science

www.irjmets.com @International Research Journal of Modernization in Engineering, Technology and Science

Source: Primary Survey, 2022

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Source: Primary Survey, 2022

10% Intraday Trader

Source: Primary Survey, 2022

Source: Primary Survey, 2022

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Source: Primary Survey, 2022

22% 24% Nifty 50

Source: Primary Survey, 2022

Source: Primary survey, 2022

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6.8 Investors behaviour towards online trading:

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