Stock markets are the engines of growth for an economy. Those who trade and invest regularly would know that capital appreciation creates wealth. Institutional investors dominate most markets around the world. These businesses make money from trading and investing in financial markets. They could be stockbrokers, mutual funds, insurance companies or foreign portfolio investors. All companies have an ownership structure based on the equity capital. Company promoters and institutional investors dominate that structure. However, another group of investors is making a mark in the Indian stock market. Those are retail investors or individuals driven by their sense of financial security. India is witnessing a boom in retail participation. Less than 1% of people bought shares or equity-related assets like mutual funds a decade ago. However, today, there are signs of change. Many more individuals are motivated to invest or trade. A lot of factors are driving that participation.
Greed and fear
Share prices are driven by greed and fear. It is an interplay of emotions that makes people take risks. For years, you kept your life savings in a fixed deposit. However, stubborn trends in consumer price inflation meant you had to look for alternatives to grow your wealth. A fear of wealth erosion due to inflation pushes you towards taking risks. As you got used to it, greed pushed you to dive deep. You added a variety of equity assets to your portfolio to mitigate the risk of high inflation. Then, you decided to take chances to generate even better returns than merely beating inflation.
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The Reserve Bank of India annual report shows that household financial savings in shares and debentures are now nearly four times more than ten years ago. While the number of demat account holders is 14.8 crore, it is still a fraction of the potential. However, there is a momentum in the rate at which demat accounts are opened. The latest monthly bulletin from the National Stock Exchange shows that of the 1100 listed for more than ten years, 971 saw an increase in individual shareholders. More than a fifth of those companies saw the number of retail investors jump five times.
The other most crucial driver for increased retail participation is greed. That is reflected in a dramatic surge in retail participation in the index and equity options trading. In the equity options segment, individuals account for over a third of the total number of contracts traded. That was a quarter of the total contracts traded just a year ago, the NSE data revealed. That is also when India accounted for 78% of options contracts traded in the world in 2023, according to the Futures Industry Association, a global body.
The intensity of retail participation in the stock market is also reflected in the muscle mutual funds have built regarding systematic investment plans or SIPs. Monthly SIP inflows stand at Rs over 20,000 crore, according to the data from the Association of Mutual Funds in India. The equity ownership through mutual funds is over Rs 36 lakh crore or nearly a tenth of the market cap.
Technology as an enabler
The rise of fintechs and rapid digitisation of the economy has enabled retail stock market participation. The Aadhaar-based verification has created smartphone-based trading terminals. Stockbrokers, mutual funds, banks and other fintech companies continue to create applications that reach you in your pocket. You can now sit on your sofa and buy or sell multiple securities in the stock market. With a tap, you can create a portfolio with your savings. The penetration of Aadhaar and smartphones is practically complete. However, not everyone in India owns financial assets. The reach can be used to create awareness about investing and trading. Many fintech and edtech or education technology companies are creating new applications that spread awareness about opportunities to channel financial savings into investments.
Conclusion
More individuals are participating in the success of Indian companies through investing. While returns in the stock market enamour them, there is a growing appetite to take risks. The increased participation in equity indexes and stock options for retail investors means many are hedging their portfolios, too.
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