India’s Retail Investor Surge: Opportunities and Risks Ahead

MUMBAI: India is witnessing a remarkable surge in retail investors, with approximately 136 million individuals participating in the stock market as of late 2022, a significant increase from around 40 million just seven years ago. This surge is largely attributed to the accessibility of trading platforms through smartphones, which has empowered many first-time investors, including Ashita Rawat, a Mumbai-based publicist who began trading stocks three months ago.

Rawat’s entry into the market reflects a broader trend among ordinary Indians eager to engage in financial discussions and capitalize on the booming equity markets. “I’ve been seeing people talking about stocks, market, buying this IPO (initial public offering), that IPO, buying these shares … I also wanted to be a part of that discussion,” she shared. Initially investing 20,000 rupees (approximately US$220), she plans to increase her monthly investments as she gains experience in selecting companies. “That has made me learn that I should do proper research,” Rawat added, acknowledging her early missteps.

Growing Participation and Access to Markets

The trend of stock trading in India has gained momentum, driven by the rising number of unique investors. According to the Securities and Exchange Board of India (SEBI), this increase has contributed to greater liquidity in the market and heightened demand for new listings. While the historic Bombay Stock Exchange remains a key trading hub, much of the new activity occurs in homes across the nation as individuals utilize mobile applications for trading.

Financial literacy advocate Srishti Gosavi emphasizes that the availability of diverse trading platforms has democratized access to investing. “Everyone who has a smartphone can now invest because there are many options available in terms of trading platforms,” she explained. She noted that currently, fewer than 10 percent of Indian households invest in stocks, indicating significant potential for future growth.

Challenges and Risks for New Investors

Despite the promising landscape for retail investors, experts caution that low levels of financial literacy pose substantial risks. Investing in equities carries the possibility of financial loss, even for seasoned investors. Gosavi warned against investing driven solely by the fear of missing out, stating, “If you are just investing with a FOMO factor that everybody is investing, I want to invest, then that is not the correct way – and a lot of people are doing that.”

In response to these concerns, Indian authorities have intensified efforts to educate investors on the fundamentals of trading. SEBI has expanded its investor education programs to help individuals understand the risks associated with stock market investments. Despite these initiatives, analysts have observed that the influx of retail participation has led to inflated demand for certain IPOs and speculative trading.

One notable case is RRP Semiconductor, which experienced an astonishing 55,000 percent price surge over 20 months, drawing the attention of regulators due to its questionable financials. Mehul Koradia, senior vice president at brokerage firm Mirae Asset Sharekhan, pointed out that many new investors overlook fundamental analysis and instead follow market trends without sufficient knowledge. “People are not going through the fundamentals and they are blindly following a few of the people and investing in the stocks,” he said.

As the market evolves, new investors face a steep learning curve. Yet, experts remain optimistic about the structural changes underway in India’s equity markets as more individuals engage in stock trading. The ongoing education efforts by regulators and financial advocates may play a crucial role in ensuring that this burgeoning investor class navigates the complexities of the stock market more effectively.