@arihant, we shared this recently.
Overall profitability of customers
Many customers decide to trade risky products with leverage with the wrong expectations that money can be earned easily and quickly. This problem has been accentuated by many claiming to generate large amounts of trading profits on social media. We have used every opportunity to create awareness that in the long run (3-year period), less than 1% of those who actively trade equity futures and options generate returns higher than bank fixed deposits or 7% annually. We will start sharing more granular information in the next few weeks. Generating profits from active trading is as hard as generating profits while running a business, if not harder, given that anyone can start trading and not everyone can start a business. The odds of succeeding when actively trading are very low, similar to any other walk of life, which requires skill, hard work, and some luck to succeed. From running a business to playing sports or music for a living.
Across our customers over the last many years, we have seen that higher the leverage the lower the chances of profitability. The profitability numbers are much lower in case of equity F&O as most trading happens in options, especially buying options which is the riskiest and the most leveraged product. We had shared this post last year on things to keep in mind while buying options.
While it might sound counterintuitive to hear this from the CEO of a brokerage firm which relies on active trading for revenue, I think a customer who remains active for many years by doing well in trading, even if not generating revenue in the short term, is a lot more valuable to a brokerage firm than customers who trade aggressively with wrong expectations and then become inactive. So when we look at our business, we think we should do whatever it takes to help the customer do well in the long run, even if it means a reduction in revenue in the shorter term. By helping set the expectation that stock markets aren’t a place to make quick and easy money, we can help the customer be risk averse, leading to better decisions with money.
As a business, we have to question the reason for our existence, it was various things in the journey, but today I think we exist only to help our customers do better with their money. If our customers do well, I think the business will automatically do well. Would it be a revenue hit in the short term if people traded lesser? Yes absolutely! But if you think about it with a 5 to 10-year view, if your customers trading lesser led to them taking much lesser risks which led to them sticking around, a lot more than the short-term revenue loss can be earned in the long run. An active customer also tends to talk about the product to friends and family and help in the business grow.
The problem with capitalism in today’s world is that everyone is thinking very short term, three months to 1 year, and prioritising the short term over the long term. But I think, ideally, it should be the other way around. Of course, I can say this because, as Zerodha, we don’t have external investors and hence don’t have an obligation to grow at a certain speed every quarter or every year.
I agree. One of the essential skills required to do well in business and investing is understanding the risk-reward payoff and then adjusting the asset allocation based on personal preference. Playing poker is a good learning ground for this. 