Historically,
during times of economic
crises and recessions, investors from the retail and institutional
categories have always shied away from investing in the stock markets. Instead, they have switched
to safe-haven assets such as the U.S. Dollar and gold. However, during the
current economic crisis
that was brought about primarily by the ongoing COVID-19 pandemic, the
situation has been quite the opposite. In a surprising move, the number of retail investors has
actually increased during this period of uncertainty. Let’s take a look at some
of the reasons why this might have actually happened.
Reasons why Retail Investors Increased:
1. More awareness and easier entry
One of the main
reasons for the increase in the retail investor base can be attributed to an
increase in awareness about the stock markets. In fact, Upstox, one of the many discount brokers
in India, reported that about 80% of its total customer base acquired during
the pandemic period came from Tier-2 and Tier-3 cities. This data point
strongly suggests an increase in the penetration of share trading and the stock markets.
Also, with the
introduction of eKYC and Aadhaar eSign, almost all stockbrokers have adopted
this methodology. This has made the trading and demat account opening process
virtually paperless and completely online, making the entry into share trading
smooth and seamless. Additionally, the many incentives and discounts provided
by brokerages have also played a major role in attracting a sizable retail
investor population.
2. Market crash and bottom fishing
The recent stock market sell-off in
March 2020 set off a sort of a frenzy amongst the investor population. Almost
all the sectors, industries, and companies faced a significant drop in their
market value. Both the major Indian indices, Sensex and Nifty, dropped by
around 30% in a matter of a few trading sessions.
Many retail investors perhaps
thought that by entering when the market was bottoming out, they could enjoy
some short-term gains when the markets finally went on a rise. This led to a
huge wave of new and first-time traders flooding the market and trying their
hand at bottom fishing. Even penny stocks were not spared, with many such
stocks experiencing a never before rise in their stock prices.
Nations around the
world, including India, were forced to adopt stringent measures to combat the
spread of coronavirus. One such measure was the string of widespread lockdowns
that literally forced people to stay indoors for months. With almost the entire
working population working from home, their schedules were not so busy anymore.
They suddenly had
more time on their hands and consequently tried to put it to good use by
getting in on some of the stock
market action. Hordes of retail investors took out a part of their savings and tried
their hand at share trading. This ultimately led to a record number of trading
and demat account openings in the history of stock markets.
4. Retail investors looking for alternative sources of income
As a consequence of
the widespread lockdowns, many businesses were forced to suspend their
operations and had to suffer serious setbacks. This directly impacted the
revenues of many individuals who had to contend with little to no remuneration
during this phase. Some of them suddenly found themselves laid off and without
a job.
Under such dire
circumstances, many such individuals turned to the stock market looking for
alternative sources of income. The increase in retail investor participation in
the month of June 2020 is in itself clear evidence of the rise in the retail
and high networth individual investors’ share in the stock market.
5. Weak returns from other investment options
In the current
economic scenario, the returns offered by many traditional investment options,
barring gold, have been very lacklustre. The bank interest rates are quite low
and the real estate sector is struggling to get back on its feet. Considering
these circumstances, more number of individuals have turned to the stock
markets in the hopes of generating some short-term profits to satisfy their
financial goals. This has led to a boom in the number of retail investors in the
stock market.
Although there is a strong increase in retail investor participation in the stock market as of late, it still remains to be seen whether this trend would continue further. As the country and the economy slowly recovers, there’s a slight chance of these investors moving away from the stock markets and onto the more traditional investment options. But, for now, retail investors are here to stay.
In uncertain times like these, safeguarding your wealth is as important as earning new returns. So, if you seek customized and expert guidance on how to secure your finances during the current economic crisis TATA Capital’s wealth management solutions are just what you need. Our team of expert wealth managers will help you find the investment strategy that’s best suited to your financial goals and help you choose the right investments across a variety of options.
16 October 2020
5 mins read
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