The Securities and Exchange Board of India (Sebi) needs to act against the menace of investment advice being dispensed online by various influencers who lure people into financial markets and products they understand little of. Last week, Sebi’s whole-time member S.K. Mohanty said that the capital markets regulator is working on a set of guidelines for so-called “finfluencers" who offer unsolicited financial advice on social-media platforms. These are people with a large number of internet followers whose choices of what to invest in—and how—they can easily sway. Regardless of whether they are qualified to dole out tips on how to multiply money, all it takes is some of these tips working out well—which often happens in buoyant markets—for such advisors to seem wise and their advice worthy. While retail investing has gained popularity over the pandemic years, and broader market participation is welcome, a worrying trend is the growing complexity of what people are being led towards by self-acclaimed advisors popping up on screens all around.
Market data reveals a problem of rookies moving rapidly into trades that only specialists ought to make: options trading, for example, a specialized derivative segment of the stock market that involves the buying and selling of options to buy or sell shares in the future at specific ‘strike’ prices. This is a tool used by sophisticated players to hedge exposures, but ends up as a device for speculation in the hands of lay investors who are typically unaware of how risky it could be. Since deals can be made at seemingly low entry prices, many are tempted to have a go at them for quick gains, usually made on future gaps between actual and pre-locked prices. Institutions may have the wherewithal to engage profitably in such trades. But individuals seldom do. That so many Indians are dabbling in these, therefore, is a concern from a regulatory perspective. Not only could novice investors lose more money than they bargained for, instability could ensue should there be excessive misguided interest in a handful of derivatives. What makes options especially risky for novices is that they allow bets greater than the money they may have. Short selling is a classic example of this. Someone who bets on a future fall in a security’s price can get a contract to sell it cheaply at a later date on the expectation of buying it even cheaper from the market by then and pocketing the difference. If the security’s price rises instead, this investor faces a loss, having to pick it up expensively. Worse, since there is no limit on how high its price can go, in theory, the money a short-seller may need to shell out on acquiring it to fulfil the contract is infinite. This can happen on a wide scale, as we saw in America’s GameStop episode last year that left a big hedge fund bankrupt. That stock had been heavily short-sold, but a shock rise in its market price set off a scramble among short-sellers to back their positions and cut losses, which sent its price soaring further—a phenomenon called a ‘short squeeze’.
Options are best left to professional investors and businesses that have dedicated treasury units with trained specialists. Retail investors could end up caught in something they don’t understand, encouraged by influencers who make all manner of dubious claims to attract an online audience. Not all of them are fraudulent, of course. Many are earnest. Yet, their free run of the internet needs to end. Sebi must not wait for a big scandal before it cracks the whip.
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