A wave of new investors have thronged the Indian stock markets in recent months during the coronavirus lockdown, triggering a boom in retail and significant rise in trading activity.
People stuck at home are glomming onto share trading like never before. Several are bored and have money to spend. Lack of alternatives to make a quick buck —betting is still not legal in India—and incentives and discounts from brokerages have attracted hordes of new investors.
To be sure, this is not the first time the markets are seeing a flurry of new investors. But the lockdown has made stock market investing and the kind of new investors different from previous years.
Most brokerages have reported a rise in demat accounts. Most of the new investors are from tier-2 & 3 cities.
On July 8, Upstox, a fast-growing brokerage, said it has acquired over 1 million customers.
“Over 80 percent of the total customer base acquired by the company are from Tier-2 and Tier-3 cities like Nashik, Jaipur, Guntur, Patna, Kannur, Tiruvallur and Nainital, among others,” the brokerage said.
The market action in June confirms this trend. When Nifty rallied more than 7 percent, the market turnover rose by over 37 percent to Rs 14.6 lakh crore on a month-on-month basis.
In other words, the share of retail and high net worth investors in the markets is showing a big uptick.
Compare that to institutional participation. Institutional turnover rose by just over 9 percent to Rs 5 lakh crore in June, National Stock Exchange (NSE) showed. Overall, activity from this class of investors has been tepid so far in 2020.
“Globally, there is a trend of increasing contribution by retail investors in the cash segment of the equity markets. The experience has been the same in India too. Over the past two years, the share of retail participation has inched gradually to over 50-52% in the cash segment,” Jaideep Arora, CEO, Sharekhan by BNP Paribas told Moneycontrol.
The coronavirus lockdown has accelerated the trend, according to him because retail investors used the opportunity to invest in corrections. “Equities also attracted investor attention due to the comparatively weaker return profile of other asset classes like real estate and fixed income,” he said.
Brokerages like Upstox said the majority of the new customers are below the age of 35, mirroring a trend in overseas like the US. But unlike in those markets, these investors are not attracted to shares like a moth to a flame. Working from home in recent months have given retail investors sufficient time to understand the nuances of share trading.
"Work from home has been definitively the opportunity for Retail and HNI Investors to study, learn about Equity, FO, Trading etc, and start investing! In addition, the falling FD rates pushed many to look at other options to make their money grow," said Arora.
Prakarsh Gagdani, CEO, 5paisa.com, a brokerage, told Moneycontrol that the retail investor has more time to read, evaluate, and understand the markets. “Besides, the massive slide during late March offered attractive valuations which created an investment frenzy. Also, most brokers offer end-to-end digital investment options and benefitted in a work-from-home scenario significantly,” he said.
The fall in markets helped. Rookie investors have been able to invest in good companies at discounted prices.
"Overall, to start investing after a market crash is a strong proof of maturity in an investor," said Arora.
This affinity for stocks is in striking contrast to what happened in 2008 when the global financial crisis hit equity markets across the globe including India.
Retail investors were the first to take a hit with equity and mutual fund portfolios depleting in double digits. Individual investors then abandoned the stock markets in hordes and it took them a couple of years to believe in share trading.
In 2020, benchmark indices fell by about 40 percent from the highs, but that did not push retail investors out of D-Street. A sign of maturity perhaps.
Nikhil Kamath of Zerodha, India’s biggest brokerage, said it is heartening to see investors invest in blue-chip large-cap stocks and mutual funds. “On Coin, our direct mutual fund platform, flows and transactions have grown 2-3X pre-COVID19 both in terms of flows and transactions.”
Maturity or not, retail participation as a percentage of total cash turnover (retail and HNI) shot up to over 80 percent in July from 76 percent in January. Institutional participation as a share of total cash turnover fell to a little over 14 percent in July from 23 percent in January 20.
Where is the money going?
Where are these new crop of investors putting their money? The answer is options, which offer high returns but are riskier. But analysts attribute their affinity due to low margin requirements and ease of executing the trade.
“One of the major reasons for the popularity of options trading is the reduction of margin on hedge positions by exchanges. Today it is as low as Rs 25,000 which was at least Rs 1 lakh earlier,” said Gagdani.
Kunal Saraogi, CEO, Equityrush, which offers structured short-term courses in technical analysis, derivatives, and trading, said a large number of new investors sign up for learning options trading. “We have seen a huge surge in interest in trading options over the last few months. Options, considered very complex, were up until recently a preserve of professional traders have become more accessible to a wider segment of traders in recent months.”
Saraogi said what has contributed to this change is a hike in lot sizes that have rendered futures beyond reach of a lot of traders and the advent of a new crop of young traders who are more inclined to take calculated strategic bets using options.
“This is visible in the huge jump in options volume on the bourses. I would call this democratisation of option trading as even newer smaller traders have entered a space previously out of bound for them,” he said.
Getting the right knowledge is important
That said, making money in a stock market is not as easy as it looks or even sounds. One mistake could create a big hole in savings that would set back people many years.
A deep understanding of the markets and training are essential for investors. Brokerages Moneycontrol spoke to said they have built systems to caution customers about the risks.
Gagdani of 5paisa.com said his company offers regular digital education on equity investing and risks associated so that investors can take informed decisions. “We suggest them investing through ETFs, create diversified portfolios with good quality stocks and provide high-quality research services at low-cost subscription,” he said.
Markets could reach historic highs. But investors would be wise to remember the world is being ravaged by a deadly pandemic.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.