Increase in Retail Participation, But Are We Making Profits?

Did you know that retail participation has increased in India by 100% during the corona virus lock down? 

Before we go into detail about what’s happening in the Indian stock market, let's see who exactly is a retail investor ?

A retail investor is someone who’s a non-professional investor. 

This includes regular people like us with jobs and businesses who’d like to try their luck in the stock market. 

But, are  investors really like us earning? Or, Are facing losses? What about the long term investors?

Before we get into finding answers for all these questions, Let’s look at more few things about retail buyers: 

• Since retail buyers are non-professional investors, they usually invest small sums of money than institutional investors do 
• They’re perceived to be less skillful, knowledgeable, and disciplined 

Did you notice the word, ‘institutional investor’? 

I will quickly explain to you what that means. 

Institutional investors are the big sharks in the ocean. In India, they include HDFC Asset Management, Birla Sun Life Asset Management, Reliance Capital Asset Management and others. They invest large sums of money and have expert market analysts on board, along with sophisticated technology for algorithmic trading & co-location. So, they usually bag up good profits. 

What’s Going On? 

Compared to the first quarter of FY21, there’s also a 57% increase in the contribution of retail turnover to the average cash volumes on exchanges. 

So, what does this mean? 

There’s clearly something that’s driving people to trade in stocks. Especially during the pandemic.

Here are some reasons why people are trading like they’ve never before:

• The falling interest rates on fixed-income instruments pushing many new investors to look at other options.
• People are trying their luck since stock prices were adversely affected due to the market meltdown in March
• Discount Brokerage and incentives on short-term or intraday trading
• Thanks to the  new online KYC norms, you can join a trading platform and get started!

Moreover, during the COVID crisis people have got more time in their hands, and the urge to earn a bit extra in every possible way. To further facilitate this, no sports to binge on and no brokerage to be paid all you need is a smartphone to take a punt in the stock market, to make that extra money. 

No wonder 100% increase in retail investment is observed during this pandemic.

No need for a laptop or  advanced computer to trade! Just a smartphone and you are good to go. As of June 2020, 23% of trading has been done on the smartphone! That's almost 9% from Feb 2020. 

Isn’t that a good thing?  Not exactly. 

So, What’s Happening? Where Are We Going Wrong? 

See, the problem is usually retail investors do not have enough knowledge and resources to track the economic cycles, change in governments policy, credit cycle, sector performance and don’t understand advance technical analysis to execute sophisticated algorithms & automated systems. 

Retail investors tend to invest in small and mid-cap companies which are not fundamentally strong, e.g do not have a consistent performance history, low Return on Investment and high net debt. Institutional investors know when to take entry and exit as they are equipped with right resources and talent as you can infer from the above graph.

Umm…..Why so? 

Most of us like to perform trades on suggestions from friends or family members without consulting a financial advisor or doing our own analysis. So, without the adequate research, the investments we make are quite riskier. 

On top of it, we retail investors don’t have as much time, money, human resources, nor infrastructure. I know, I am stating the obvious.

Let me put this straight, it's kind of great the amount of retail investors have increased in such a short time from the business perspective. 

But, what about the long run? 

Most retail investors end up suffering losses in the long term due to minimal understanding of what they're doing in terms of strategies. As most of the trade performed is influenced by other factors than on data and research. Most of them buy or sell shares under pressure or panic because everyone else in the market is doing so or we are expected to do so or even worse just because somebody told us too. In such cases we tend to suffer more losses than making profits. 

This can create chaos in the market! Whereas the market is already in a volatile condition due to the pandemic. 

How Can You Get More Profit? 

Through the right perspective, of course! 

There’s no one right solution to this problem. But, as a retail investor there are few things that we should do to earn those amazing profits.

One of the  first steps could be using a disciplined approach to make profits. 

We need to systematically invest the right amount of funds in the right shares. For this, we should be prepared to absorb the calculated risks and decide the course of action to be taken. 

In most cases, when people are making money, greed tends to over take them, makes them wait longer than they should, resulting in not being able to take as much  profit.

The stop-loss order can prove to be extremely successful in managing losses. 

But what is it? 

Suppose you have bought shares of Company Z worth Rs. 500 and set up a stop-loss at Rs. 450. The moment the price falls to 450, the shares will be sold. So, you’ll only incur a loss of Rs. 50. 

So, it’s best to be clear about how much loss you’re willing to incur before entering the trade. It’s better to play smart when you are against big sharks rather than pushing yourself to be like them. Remember we all got our own strengths and weaknesses, use it wisely and you will be able to bag a win.

The big sharks may have funds and experts, it doesn't matter we can always do our own research. Doing your research and believing it is even more important than investing in right stocks since it gives you a base for your investment plan. You should also try to take advantage of newer technology for trading and research available at your disposal. They may help you save some of your precious time.  

I hope this helped you! Share your views on the blog in the comments section.