Introduction

As we witness India's varied and ever-evolving financial ecosystem, the term 'retail investors' has become more popularised. The basic definition of retail investors is investing their money in financial instruments (shares, mutual funds, bonds, exchange-traded funds (ETFS)) towards their personal financial goals, like wealth creation, or for retirement purposes. Retail investors do not pool their investments like institutional investors, mutual funds, insurance companies, or foreign portfolio investors; they invest their own money or money with advice from a financial institution.

The Meaning of Retail Investors

Retail investors are average Indian, salaried workers, independent small business owners, students and all stakeholders, who invest a small amount of their relatively small savings in the stock market or other investments. Retail investors typically use trading platforms, e.g., Zerodha, Upstox or Groww, to buy and sell securities. Retail investors do not have the professional trading capacity; retail investors invest to incorporate wealth growth over the years while balancing regular monthly expenses like home loans, children's schooling and education.

Retail investors speak more than just trading. Retail investors have their aspirations, be it purchasing a dream home, sending their children off to a good education at a university, and having a compensated retirement. For example, Priya is a schoolteacher in Bengaluru who invests ₹5000 monthly in mutual funds via a Systematic Investment Plan (SIP). Arjun is a young IT professional in Mumbai who trades stocks on Zerodha to create a diversified portfolio. These retail investors show how many average Indians are investing in the marketplace.

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What does a retail investor do?

Retail investors engage in a broad set of activities to create wealth.

Research & Analysis: They can research a company's fundamentals, examine market movements, or consume information via news sources like Moneycontrol or the Economic Times. Many retail investors prefer apps that provide stock tips or track portfolio performance.

Trading & Investing: Retail investors will buy and sell their shares, mutual funds or bonds via a demat account. Retail investors have preferences for different investment horizons. For some, buying and holding blue-chip stocks and index funds is a long-term investment approach. On the other hand, some swing traders may buy and sell stocks and ETFS throughout the day or intraday trading.

Diversification: Retail investors invest across sectors (IT, banking, pharma, etc.) and asset classes (gold, fixed deposits) to mitigate risk.

Learning and Adapting: Retail investors continue to educate themselves through YouTube videos, webinars, and financial influencers. It takes them time to learn to act better over the long run.

Retail investors have always had a disadvantage compared to institutional investors in whatever market they participate in due to limited capital, higher transaction costs, and less access to exclusive investment opportunities like Initial Public Offerings (IPOS). However, companies like Smallcase and discount brokerages have levelled the investment playing field for retail investors, allowing them to trade competitively in India's dynamic markets.

Market Impact of Retail Investors

The market impact of retail investors in India has increased significantly over the last decade. Estimates indicate that retail investors account for nearly 35-40% of the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) trading volume. The increase in retail participation can be attributed to several factors, including financial literacy, low-cost trading apps, and a young tech-savvy demographic.

Retail investors make market liquidity possible by contributing to the active trading of stocks and stabilising prices. They can also have a collective impact on the overall market. For example, retail investors helped extend a rally in the small-cap stock universe in India in 2021, as evidenced by the record highs of indices like the BSE SmallCap and Nifty Smallcap 100 over a short period of time. Similarly, retail investors’ enthusiasm for IPOS (such as Zomato and Paytm) has changed how companies raise capital.

Why do Retail Investors Matter?

Almost all retail investors in the market are part of India's great migration towards financial inclusion. This continued growth is fuelled by different investor education initiatives, such as the Securities and Exchange Board of India (SEBI), which regulates financial advisers and actively promotes investor education. However, retail investors lack the sophisticated tools and insider knowledge of institutional players. Furthermore, they often serve as tools for bubble behaviour, like in the push and frenzy over meme stocks and other hyped initial public offerings (IPOS). Retail investors need to learn to maintain discipline with their investments, diversify their portfolios and avoid doubling down on terrible positions through impulse trading.

Conclusion

The emergence of retail investor participation is reshaping the financial ecosystem in India. Retail investors are entering the market at an unprecedented rate, increasing personal wealth and aiding India's economic development by deploying savings into productive assets. Retail investors should focus on the following: start small, and as they grow knowledgeable, continue to invest in equity assets often. With the proper investor approach, retail investors can understand the necessary complexity of the market and participate in India's progress towards becoming a global economic powerhouse.

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