Retail Investor: The New Kid On The Block
The markets are always exciting when stock prices gain but they can be said to be in a frenzy mood when you have more than 1,000 listed shares doubling in one year. What is eye-popping in this market rally is the rapid increase in participation by retail investors. In this cover story Yogesh Supekar highlights the global trend that is indicative of larger shift in ‘who dominates the market flows’ while also discussing the implications for portfolio returns
CDSL, one of the only two security depositories in India, got listed on the bourses in 2017. Since its listing the stock did not do much for almost three years. CDSL, with a premium of over 80 per cent over its issue price, was listed at Rs 250 per share and by the end of June 2020 the stock was trading at Rs 274 per share. The rally in CDSL had already begun post March correction and the stock has become a four-bagger (4x) in 14 months since the pandemic-led market correction – trading in excess of Rs 832 per share. As a leading securities depository in India, CDSL earns revenue by charging annual issue fees to corporates and also makes money by charging account maintenance fees, user facility charges and transaction fees to depository participants (DPs.).
As an ever increasing number of customers use the CDSL facilities, the company stands to gain – it is a simple and straightforward revenue business model. Recently with the advent of the pandemic-led lockdowns there has been a huge surge in new demat accounts that have led to increased profitability for CDSL, which is simply getting translated into roaring stock price for CDSL. Says Mohit Punjabi, who is an active investor and trader in the markets, “Last year when the lockdown was announced and markets crashed, I was looking for stock ideas that would benefit from the lockdown. After the correction one thing that I noticed was that all my friends had become active in the equity markets. Suddenly everyone wanted to invest as they perceived that a correction of more than 20 per cent in the Sensex and almost 50 per cent in majority of the BSE 500 stocks was a ‘once in a lifetime’ opportunity.
“Sensing that the trading volumes will increase manifold in markets I betted on stocks like BSE and CDSL. I bet on these stocks because I was confident that these two companies would not be shut down owing to the nationwide lockdown. Also, I assumed that the expected increase in trading volumes in equities would certainly benefit these companies. I am glad my expectations were correct on both the counts. Only yesterday I was reading an equity research report published by a leading broker that suggested that BSE fundamentals may improve going forward owing to growth in revenue due to continued growth in transaction volume, STAR MF and stable listing revenue. I expected the transaction volume to increase and I think this will increase more with a larger number of investors participating in the markets,” he adds.
A New Trend
In hindsight it is easy to recognise a trend. No one could have guessed this increased appetite for equities amongst retail investors. The trend of increasing investors’ participation in equity markets is a global trend and not necessarily restricted to Indian markets. In fact, in the US market, which is supposed to be one of the most vibrant of all the equity markets, the frenzy amongst retail investors is at an all time high going by the increased participation. With the advent of Robinhood traders the participation of retail investors has broken all records and reflects the adventurous attitude of the millennials who are much younger than the traditional equity investors market is accustomed to.
According to reports, the average age of the new investor is 30 years and the attitude is that of risk takers who do not know or have experienced losses in the markets, at least yet. Such aggressive attitude, some experts believe, may come from lack of knowledge and discipline or both. Observers think that the emerging group of young investors believe in YOLO (you only live once) philosophy and do not care much about savings and retirement planning and losses. This new group wants to go for a killing and want to make it big in no time. The participation in US markets is also said to have increased owing to the launch of new apps related to stock investing and broking, such as Robinhood.
Investing in equities is promoted as if it is sort of an entertainment game. Huge leverage is provided and investors in US can also buy US stocks at a fractional price – meaning if the price of Amazon is USD 3,000 per share, one can still invest USD 10 in Amazon and own the fractional share. The owner of a fractional share gets the benefit of the appreciation in the underlying share price. Fractional shares have become hugely popular in the US markets and are facilitated due to superior broking technology. The improved technology, heavy leverage available to the traders, frenzy for options trading, lockdowns, stimulus cheques deposited in US’ citizens account and volatile markets all put together have led to huge spurt in individual investors participation in the markets so much so that this emerging group of Robinhood investors are now being taken seriously by the institutional money managers.
Robinhood investors’ investment behaviour and pattern is being analysed and studied by the institutional money managers as they have become a force that can influence the market direction by themselves. Is it the same case in India? Not really, one would say. However, market observers are no more taking the new investors group that is much younger and consist of fearless millennials lightly. It is a force to reckon with and the direction of the market can be influenced by such a group of investors who may take investment decisions in a group influenced by social media. There is a typical herd mentality associated with this new group of investors that is not afraid of investing at higher price levels.
That said, Indian investors may be better protected than their western counterparts due to strict measures announced by SEBI on margin trading. While investors in the US markets are lured to equities due to extremely high leverage opportunity and instruments such as fractional shares and options on options that can be bought with fractional amount of money, this may not be the case in India. SEBI has recently announced strict measures controlling margin trading. This may have already impacted the incremental rise in volumes for Indian markets. Effective from March 1, 2021, SEBI has hiked the upfront margin requirement to 50 per cent from 25 per cent, and this has had a negative impact on trading volumes and may continue to dampen the individual investors’ and traders’ interest in the equity markets as in the next two phases SEBI plans to take this limit to 75 per cent by the end of August and then 100 per cent by September.
Major Gains for Stock Brokers
In spite of these stricter upfront margin norms the profits for some of the top stock brokers has more than doubled in FY21 driven by 50-75 per cent growth in revenues. This was possible owing to the retail investors trading in equities like never before in the past few months. Top listed broking firms were major beneficiaries of such a change in trend in the past one year. This increase in demand for stock broking services saw promoters, FPIs and MFs increase stakes in broking firms such as Motilal Oswal Financial Services and IIFL Securities. Some of the stock broking firms have had phenomenal success on bourses in FY21.
The table below highlights the performance of listed broking companies on the bourses.
Like its counterparts in the US, the broking companies in India also have been luring investors and traders with flat fee structures. Says Prabhakar Tiwari, Chief Growth Officer, Angel Broking, “We have a flat pricing structure. The delivery trades on our platform are free of cost whereas futures and options, intraday, currency and commodity trades involve a flat fee of Rs 20 per order, irrespective of the order size.” The growth in investors’ accounts has also been facilitated due to ease of boarding process and new technology adopted to make it easy for new investors to trade in markets. There is also a remarkable surge in new demat accounts from Tier II and III cities. Tiwari adds, “It takes less than five minutes for a customer to register and start trading with us. We have made considerable inroads into Tier II and III cities using this digital approach.”
“For instance, Tier II and III cities together contributed to approximately 92 per cent of gross client addition at Angel Broking in Q3FY21. The client addition from Tier III cities in Q3FY21 increased 9.3 times over Q1FY20 when we began our ‘digital-first’ journey. It has also climbed 6.7 times in the case of Tier II cities during the same period. The Indian broking industry can be said to still be in its embryonic stage. Retail participation in India was about 4 per cent as of December 2020. As compared to this, China had 11.4 per cent penetration in December 2019 while the USA has 32 per cent penetration,” he adds.
Rise of Retail Investors and Ownership of Indian Equities
For years market participants have been acknowledging the influence and clout of FIIs in the Indian markets, so much so that the development of the Indian capital market was permanently linked to FPIs participation. The FIIs ownership rose by an impressive 120 bps QoQ in the December quarter from the record lows in September quarter. This happened when we witnessed a drop in private Indian promoter ownership in the NSE-listed universe which can be said to be a reversal in trend over the previous three quarters. Government ownership increased in the December quarter from record low levels in the previous quarter. The retail investors’ holdings however remained steady in the December quarter after recording a steep rise in the September quarter.]
Some profit booking by individual investors in the December quarter was seen while the same group of investors was heavily buying into equities throughout 2020. In 2020 almost 10.5 million new investor accounts were added by NSDL and CDSL combined. This is almost a 1.3x jump YoY. What is also noteworthy is the share of individual investors in the cash market turnover which shot up to 46 per cent during April to December 2020 as against 39 per cent in FY20. These new investor accounts addition of 10.5 million is the highest in the last 10 years, representing 21 per cent of the outstanding active investor accounts. The sharp increase in volatility in March 2020 leading to a market crash and an equally sharp recovery in the markets amplifying the positive market sentiment aided with lower interest rate environment helped participants bet on equity prices nonchalantly.
"Investors should purchase stocks like they purchase groceries, not like they purchase perfume."
-Ben Graham
Conclusion
Experts are divided on this shift in trend where the individual investors as a group dominate the market moods. Some believe this trend of market dominance by individual investors’ group is only going to increase while some believe it will subside once we go back to our normal lives where majority of the working population starts going back to the offices. Both sides have reasonable arguments; however, it is only reasonable to say that the trading volumes and growth in participation in equity markets will depend on several factors including low transaction costs, user-friendly technology that makes it easy for first time traders and investors to buy and sell, volatility in markets (it is observed that recently more volatile an asset class more the participants it can attract), investor education and awareness, performance of the equity markets, relative performance of other asset classes including gold, real estate and crypto currencies (Bitcoin) and easy access to liquidity for small investors.
While strict SEBI norms threaten to curb the margin trader’s enthusiasm, the new strict norms are likely to bring greater transparency and at the same time strengthen the market which actually works in the interest of traders in the long run. As the new framework is likely to strengthen the overall safety of the markets, this may be a welcome move. That said, some of the leading brokers think that the trading volumes may see a dip of 15 per cent to 20 per cent in FY22 even if the markets do well. It’s true that retail investors are taking some great strides in the US markets but what needs to be understood is the fact that almost 90 per cent of the so-called Robinhood traders are making losses – some making losses that they cannot possibly recover in their lifetime – due to over-leverage and not knowing what they are trading.
There is an overuse of complex instruments such as SPAC, option trading and margin trading in the US markets, which may not be the case in Indian markets. While the participation in Indian markets by individual investors is expected to increase, we may not see market frenzy participation as in the case of some of the developed countries. Retail investors as a group and their investing activity will now onwards be discounted carefully and may be included in the study of analysts while predicting market trends just like an individual investor wants to know the level of interest of DIIs and FPIs in the markets and the underlying security. Since social media is increasingly influencing how individuals think and live, one should not be surprised if the social media starts dominating the individual investors’ view on equity markets and stock ideas. The trend of increasing participation of individual investors who have a tendency to take higher risk and who want to make it big in the stock markets without spending years waiting for the fruits threatens to turbo-charge the markets when liquidity is at an all time high and the cost of money is the lowest that we have ever known.