Retail Investors – By product of the Pandemic

Introduction


The Coronavirus Pandemic has led to the loss of livelihood for millions of people across the globe, but there has been a distinct rise when it comes to a certain economic group – Retail Investors.


According to SEBI regulations, a retail individual investor is an investor who applies or bids for securities for a value of not more than 2 lakh rupees in an Initial Public Offering (IPO) and buys or holds shares worth less than 2 lakh rupees in stock. In common parlance, a retail investor is one who purchases securities in his or her own personal account and not for an entire organization. Further the trading sums would be much smaller than institutional investors like mutual funds.


Increase in Retail Investors


Online Trading platforms in India have seen a monumental rise in the number of retail investors registering during the Pandemic, and even existent investors are trading more regularly. Trends suggest that overall retail participation has increased in terms of ‘Average daily Trading Volume’(average number of shares traded within a day in a given stock) . It is not just retail participation from existing players that has increased, but the rush to open new accounts to invest has never been like this before.


The bigger online brokers such as ‘Zerodha’ have seen 300% bump in monthly new account openings from January until June. Others such as ‘Motilal Oswal’ have seen a great surge in their mobile application downloads, as they have started handling more than one million trades per day. Others such as ICICI securities, Angel Broking and IIFL have also seen a major upswing in their trading activity.


This phenomenon is not limited to India, world over there has been a sudden realization with respect to the importance of investing. Researchers from the Paderborn University in Germany have also reached a similar conclusion. According to their analysis, retail investors increased their trading activity by approximately 13.9% for every doubling of Coronavirus cases over the past few months. They concluded that trading activities increased both at an intensive and extensive margin and will continue to do so as long as the pandemic lasts.


Reasons behind the increase


The reason for the same is quite basic. Researchers state that one of the main rationales for gambling is considered Boredom. It is a matter of fact that various investors have entered the trading sphere out of boredom and have found some form of amusement in seeing the markets fluctuate. For instance, in Canada where 500,000 new online brokerage accounts were opened in the first few months of the Pandemic, most new users comprise of grocery store workers, plumbers, waiters who have a great deal of time on their hand.


Work from home has definitely been a game-changer for many, as individuals have the time and the freedom to constantly keep an eye on the market to make such investments. For a retail investor, stocks are a good alternative when the changes in the market can be manipulated closely, otherwise a risk averse option would be mutual funds.


With various sectors coming to a standstill, people have realized the real value of investing. A large number of young adults, precisely between the ages of 18 and 30 have taken to investing because of the widespread lockdowns. The social restrictions imposed during the Pandemic have forced many youngsters into spending their time learning and exploring the financial markets.


Another major reason behind the increased interest in trading during a widespread calamity is the speculative motive. It is ordinary for people to project that when there is a sudden crash, buying stocks will give them a gain as the economy booms. This problem here is that with such a Pandemic, one cannot estimate the time it will take for things to get back to normal. It has already been almost half a year and the situation is only worsening, at least in India. Then why are retail investors increasing and the market still going steady?


Consequences


One answer is the theory propounded by Nobel Laureate Robert Shiller, who blames ‘irrational exuberance’ for the increase in retail investors and therefore a steady market. He blames crowd psychology for the current rise in investments and calls it a narrative epidemic. Much like the virus, an investor shares his success story during the Pandemic, which causes more people to invest money in the market. After all, most amateur retail investors get influenced by success stories rather than statistics and financial reports.


This bubble of success keeps increasing in size almost like a Ponzi scheme. A disastrous event such as a second wave of the virus could act as a catalyst causing the bubble to burst. This could have adverse effects with this whole new class of retail investors losing a lot of money. Yesterday, when it was announced that India’s GDP contracted by 23.9%, the highest contraction and the first decline since India starting publishing growth data, the markets have slumped considerably. It remains to be seen whether the bubble is going to burst or if we are being a tad bit too pessimistic.


One thing is for sure, a lot of retail investors are highly optimistic and see the Pandemic as an opportunity to make some money. It has been beneficial as well, because when Foreign Investors are pulling out and Institutional Investors are being risk averse, retail investors are really holding on. In my opinion, it is a race against time. Retail investors cannot hold on for too long, and if the Pandemic persists then economic calamities are inevitable.

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