Retail investors need protection. From themselves

“The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind,” says the character Gordon Gekko in the movie ‘Wall Street’ (1987).

Over the past 18 months, the Indian stock markets have witnessed a range of emotions – euphoria to frustration to worry. Investors seem to have moved from worrying about Covid to fearing for life and livelihood, to greed-based stock investing.

In the frenzy to believe every quick-gains idea that leads them to throw away prudent aspects of investing, retail investors have forgotten the core purpose of any business. That it is not about sheer valuation, and that is about serving consumers and having longevity and profits. When investors are singularly bullish, it’s a cause of worry about their complacency. Last year proved that there’s more than a smile in the old joke, that IPO stands for “it’s probably overpriced”.

Indian stock market has a large presence of individual investors. NSE data shows that they have brought nearly 90 lakh new investors to the trading platform during FY2021. While BSE has added over 1.8 crore new investors between May 2020 till recently.

Data also shows that millennials have come into the market as new investors. The NSE data also shows that more than half of new traders came from outside India’s top 50 most populated cities. The economic slowdown since last year added the sentiment of potential loss of livelihood. This acted as an incentive for the need for an additional source of income – Stock trading!

The democratisation of cheaper internet access along with the availability of low-cost smartphones has added a tool to the investors in hinterland India. BSE data shows that 19 per cent of trades were made on mobile devices in December 2021, compared with less than 3 per cent five years ago.

Data from NSE shows that retail investors have slowly moved up from a 33 per cent market share (of trading turnover) since 2016, to 45 per cent in 2021. If you look at non-promoter holdings (“floating stock”) of the market, individual investors who had 18 per cent share of it, now have only nine per cent. In a nutshell, the institutional investors are “Holding the stake”, while the “trading movement & most of the price volatility” is on account of the retail investors.

Most of the first-time investors have been experimenting with their trades. Not all of them have an investment theme in mind. More individual trades seem to be pushing up the market prices. What if many of them are viewing the stock market investment as a thrill or entertainment? What happens when the beginner’s luck runs out?

Crying foul at a loss

Everyone assumes that the regulators have to step in to protect the retail investors – across product categories like stocks, crypto, banking bonds, etc. If there is mis-selling, the regulator can act. What about these... Often many retail investors get overtaken by greed, and heed to ‘investment advice’ from their paanwala or second cousin’s best friend or a so-called WhatsApp chat group tip about a particular stock. How can regulators protect such consumers from their greed ?

If one cares to look at data of IPOs over the past five years, it shows significant data to say that retail investors want to book IPO gains, immediately after listing. The volume of retail investors who exit the just IPOs stocks within the first week ranges from a significant minority to the actual majority of the total investor base! If they lose money when the IPOs scrip falls in listing value, then many cry foul. Do those consumers (investors) still need so-called ‘protection’?

During times of a sell-off, investors tend to sell their holdings in panic while in periods of speculative booms, they buy at high valuations and display exuberant optimism. Is the regulator expected to protect them again? According to regulations, every company aiming to raise monies from the investors in the stock market has to submit a lot of data, information and disclosures in its IPO document which are in the public domain.

How many of the retail investors actually read anything in it, before investing in that stock?

Making an investment give returns is a hard task. It requires discipline, research and calm. If it were not that simple and yet hard, all of us would be billionaires (atleast of the rupee kind!). Yet many retail investors don’t want to do this and look for ‘street tips’ which could mislead their investments. Do they still need regulatory protection?

Risk is a word that almost never features in many retail investor conversations. The combination of lack of understanding the risk factors and investor greed is a deadly financial cocktail. It is intoxicating at the beginning, and the financial loss-hangover lasts much longer than any. Understanding one’s risk appetite is a key ask to be factored into, while investing. Greed makes one overestimate the risk appetite and end up with volatile scrips.

With the genesis of our markets having had socialist policy-markings, we still carry the legacy of ‘consumer protection’ as an overarching regulatory umbrella. Rightfully so, for we need to take care of our burgeoning population with its various haves and have-nots. But why should the regulator get unduly burdened by investors’ greed, blind over-confidence and unwillingness to understand risks? How can regulators protect the investors from themselves?

The retail investors should note that there is no substitute for research, understanding the investment risks, and having a vigil on each of their investments. In short, “Beware. Be aware. Else you are the ware!”

The author is corporate advisor & independent markets commentator

COMMENT NOW