Is this the era of the retail investor?

Asia's Tech News Daily

retail investor, financial markets, Indian stock market, stock market, Dhiraj Relli

Retail investing had been on the rise even before the pandemic hit the world. But Covid-19 gave just the push required to send young investors all over the world to the financial markets. In the UK and USA, the government stimulus packages put money into the hands of the people who were stuck at home due to the lockdowns with no other way to enhance financial security than try their hand at trading.

Of course, retail investors put in much smaller amounts into the markets, as compared to institutional investors. But their sheer numbers in 2020-21 surprisingly moved the markets. Consider the January 2021 flashpoints where GameStop was soaring and the term “meme stock” was coined. Reddit users took on institutional traders, backing GameStop’s stock and sending the share price up more than 1,700%, compared to December. In fact, Credit Suisse estimated that a third of all stock market trading in the US in 2021 is accounted for by retail investors.

retail investor, financial markets, Indian stock market, stock market, Dhiraj Relli

Source: Bloomberg Intelligence

India hasn’t been left behind in the worldwide surge in retail investors. Take a look at the state of the retail investor in India.

The Numbers Say It All

A major shift in investment trends started in post-pandemic 2020, when active investor accounts increased by a record 10.4 million in India. At the same time, retail stock ownership in the 1,500+ companies listed on the National Stock Exchange (NSE) rose 9% in Q3 2020, the highest rise since March 2018.

Retail investor participation continued to grow exponentially in FY21 as well, with almost 4.5 million retail investor accounts being added in just the first two months of the fiscal year. The total number of retail investors increased by an astonishing 14.2 million in FY21, with 12.25 million new accounts being opened on CDSL 1.9 million in NSDL.

The result is that the Indian stock market is now dominated by retail investors. The NSE alone saw retail investors share grow from 33% in 2016 to 45% in 2021. The interest isn’t abating either, with monthly registration of new investors increasing to an all-time high of 1.5 million in June 2021.

The Trend is Broader than the Equity Markets

The rise of the retail investment isn’t limited to stock trading on exchanges. Equity mutual funds have also seen a jump, with individual investments rising 16% in February 2021, as compared to the same month in the previous year.

The futures and derivatives markets have also seen unparalleled retail interest. The index futures markets, which accounts for a major share of the Indian derivatives market, saw individual investors overtaking institutions. In fact, 39% of the index futures market is accounted for by retail investors, with foreign investors (FIIs) making up only 15%.

This rise of individual investors is a part of a broader shift among Indians, away from the traditionally preferred physical assets, such as gold and real estate, as well as bank deposits.

Tier 2 and 3 Cities Surge Ahead

This isn’t the first time that India has seen a retail investment boom, but it certainly is the first time that these first-time investors are joining the financial markets from outside the metros of Delhi and Mumbai. Brokers and investment firms are seeing an increasing number of new customers coming in from the smaller towns and cities of the country.

The investing pattern has also changed across regions over the past two years, although the northern and western Indian regions continue to dominate in terms of the total number of new registrations. As of June 2021, Northern India accounted for about 37% of the total registrations, while East and South India saw an increase in retail interest, as compared to 2020.

retail investor, financial markets, Indian stock market, stock market, Dhiraj Relli

Source: NSE

Drivers of the Rise of Retail Investment

One of the key reasons for this unprecedented increase in individual investors has undoubtedly been the pandemic. This is a trend that has been witnessed all across the world. Salary cuts, job losses and an uncertain economic future, coupled with lockdowns, left millions of people stuck at home looking for ways to augment their financial situation.

But the pandemic alone couldn’t have had such a significant effect without the support of technology. Firstly, the penetration of the internet to the remotest corners of the nation opened up a whole new world of online access for Indians. This also meant improved accessibility to investment education, market news and growing awareness of various forms of investment.

In addition, a significant percentage of investors from tier 2 and 3 cities gained access to newer asset classes and means of portfolio diversification. The entry of investors from smaller towns and cities has played a pivotal role in the changing investment landscape in India.

Technological advancements have also empowered investors with robust tools for online trading, which offer transparency and access to real-time price movements. This is a huge shift from the past, when real-time trade execution was rare, given that the only access to the markets was through multiple phone calls to brokers and other market participants.

Tech advancements have also brought us easy-to-use investment apps, while social media has provided access to all the chatter in the investment community. Twitter, Telegram, Reddit, etc., are home to large and very active investor communities that are always ready to offer their market analysis and investment opinions.

In addition, low interest rates have made traditional investment avenues, such as fixed deposits and debt instruments, less attractive. Investors are, therefore, looking at new avenues that will offer inflation-proof returns.

Is This a Temporary Trend?

So, is this a transitory occurrence that will revert when the economy recovers or is it the beginning of a behavioural change, in India and worldwide? It certainly seems like retail investors are here to stay and grow in number. This shift will be fueled by more and more millennials and Gen Zers joining the financial markets. Their approach to investment is very different from that of their predecessors.

In fact, as the digital infrastructure continues to grow and digital natives continue to enter the markets in droves, some experts predict that online trading could reach a value of $14.3 billion in India by 2025.

Investment Tech Market in India

retail investor, financial markets, Indian stock market, stock market, Dhiraj Relli

Another factor fueling this trend and ensuring that it will continue for the long term is social media. From the subreddit WallStreetBets that moved GME and AMC to record heights to the active trading community on Twitter and even WhatsApp messaging groups, there is an entire ecosystem supporting today’s retail investors.

I think it could be safe to say that we are seeing a revolution in the financial markets that will alter the future of investing.

(The author, Mr. Dhiraj Relli, is MD & CEO, HDFC Securities. The views are his own.)

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