Risk Disclosure

SEBI has mandated that every Registered Broker must inform clients of the risks associated with trading in the securities market. It should cover:

• Risk of loss in trading/investment: Investing or trading in securities (such as stocks, debt instruments, derivatives, etc.) inherently involves financial risk. Market prices can fluctuate due to a variety of factors (economic, political, sectoral), and investors may incur partial or complete loss of their capital.
• Price volatility and illiquidity: Volatility refers to rapid and unpredictable price movements in the market.
• Illiquidity arises when a security cannot be quickly bought or sold in the market without a significant price change due to low trading volume.
• Risks of margin trading
• Online trading risks (connectivity/system errors): Online trading platforms depend on various systems (internet, servers, third-party APIs). Technical issues such as downtime, slow connectivity, or software glitches can impact order placement and execution.
• Regulatory and legal risk: Changes in laws, regulations, or compliance requirements by SEBI, exchanges, or other regulators may affect trading and investment strategies, or even result in suspension of certain products or accounts.

Product-Specific Risk Disclosures

If the broker offers:

• Derivatives: Disclose volatility, leverage, risk of substantial loss
• Mutual Funds: Market risk, interest rate risk, NAV fluctuations
• IPO/Equity: Disclosure of price fluctuation risk, allotment uncertainty
• Algo Trading: Risk of system errors, high-speed trading exposure

Risk disclosures on derivatives (the following points may be place in a short page accessible through a click)

1 Leverage Risk (Gearing Effect): Derivatives are leveraged instruments, meaning a small price movement in the underlying asset can lead to large gains—or large losses—relative to the initial margin

2. Mark-to-Market Losses and Margin Calls: Futures positions are settled daily on a mark-to-market (MTM) basis. Losses must be covered by additional margin. Failure to pay may result in liquidation.

3. Risk of Unlimited Loss in Short Options or Futures: Selling (writing) options or taking futures positions can result in unlimited losses if the market moves unfavourably.

4. Liquidity Risk: Not all derivatives contracts are actively traded. Illiquid contracts can cause execution delays or inability to exit positions at desired prices.

5. Volatility Risk: Derivatives prices can be more volatile than underlying securities. Sharp price swings can rapidly erode value.

6. Expiry Risk / Close-out Risk: All derivative contracts have fixed expiry dates. If not squared off in time, they are settled compulsorily, sometimes at unfavourable prices.

7. Regulatory Risk: Derivatives markets are heavily regulated. Changes in SEBI or exchange rules can affect trading, margins, or contract availability.

8. Suitability Risk: Derivatives may not be suitable for all investors due to the complexity and risks involved

• During the last ….. year, 9 out of 10 individual/retail investors/ traders in equity Futures and Options Segment, incurred net losses.
• On an average, loss makers registered net trading loss close to ₹ 50,000.
• Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
• Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

Source:. SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22