Newbie retail investors flocking to the stock market: Who will gain, who will lose?

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Post the market crash of March 2020 retail investor participation in the stock market has been witnessing an explosive growth. In March 2020 the number of demat accounts in India stood at 4.09 crores. Since then, the number of demat accounts has been steadily rising and reached 10 crores in August 2022. Retail investors now account for 52 percent of daily transactions in the market with DIIs and FIIs accounting for 29 percent and 19 percent respectively. Clearly, equity cult in India is spreading.

Retail investor participation in equity market is desirable. It promotes financialization of savings which, in turn, channelizes savings from unproductive assets like gold into productive investment, thereby contributing to higher capital formation and economic growth. It enables investors to participate in the wealth creation happening through the capital market.

Gullible newbies walking into the YouTubers’ trap

However, some unhealthy developments have emerged which deserve serious attention. Large numbers of newbie retail investors have taken to speculation in the stock market in hopes of becoming rich quickly. Scores of Youtubers have sprouted, luring the newbies into training programs enticing them to get rich quickly by trading in stocks and derivatives. There are video ads like “Bring Rs 20000 and earn Rs 5 lakhs”, “How I made Rs 50 lakhs in 2 days” and such outlandish claims. Unfortunately, large numbers of gullible newbies are walking into this trap.  

Speculators will lose

It is a well-known fact that the vast majority of day traders and speculators in derivatives lose money. The founder of India’s largest online broking firm had categorically stated that 95 percent of day traders and speculators in derivatives lose money. Yet, the prospect of getting rich quickly is luring tens of thousands of newbies into stock market speculation. During the unusual one-way bull run in India from April 2020 to October 2021 which took the Nifty from 7511 to 18604, many newbies made money from trading. But since then, markets have turned highly volatile, and traders are steadily losing money. Going forward, most of these newbie speculators in the market are going to lose big money in the roller-coaster market. History will repeat!

Investors will gain

The healthy trend in the market is the steadily rising number of mutual fund investors. It is a fact that most retail investors don’t have the expertise to successfully invest in the market. For them, the best option is to invest through mutual funds. It is heartening to note that there is healthy growth in the AUM of mutual funds. The AUM of the mutual fund industry has grown from Rs 30 trillion in November 2020 to Rs 39.5 trillion in October 2022. It is a proven fact that Systematic Investment Plan (SIP) is a safe and profitable investment method. The amount under SIPs have grown from Rs 8000 crores before the pandemic to a record Rs 13000 in October 2022. Without doubt, these investors will gain.

There is a high probability of India’s GDP and market cap rising to $8 trillion and $10 trillion respectively by 2032. The potential wealth creation through the stock market in ten years can be three times the wealth created till now. Patient investors will reap the benefits of the ‘India Growth Story’.

First Published in Economic Times.

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