Historically, during times of economic crises and recessions, investors from the retail and institutional categories have always shied away from investing in the stock markets. Instead, they have switched to safe-haven assets such as the U.S. Dollar and gold. However, during the current economic crisis that was brought about primarily by the ongoing COVID-19 pandemic, the situation has been quite the opposite. In a surprising move, the number of retail investors has actually increased during this period of uncertainty. Let’s take a look at some of the reasons why this might have actually happened.
Reasons why Retail Investors Increased:
1. More awareness and easier entry
One of the main reasons for the increase in the retail investor base can be attributed to an increase in awareness about the stock markets. In fact, Upstox, one of the many discount brokers in India, reported that about 80% of its total customer base acquired during the pandemic period came from Tier-2 and Tier-3 cities. This data point strongly suggests an increase in the penetration of share trading and the stock markets.
Also, with the introduction of eKYC and Aadhaar eSign, almost all stockbrokers have adopted this methodology. This has made the trading and demat account opening process virtually paperless and completely online, making the entry into share trading smooth and seamless. Additionally, the many incentives and discounts provided by brokerages have also played a major role in attracting a sizable retail investor population.
2. Market crash and bottom fishing
The recent stock market sell-off in March 2020 set off a sort of a frenzy amongst the investor population. Almost all the sectors, industries, and companies faced a significant drop in their market value. Both the major Indian indices, Sensex and Nifty, dropped by around 30% in a matter of a few trading sessions.
Many retail investors perhaps thought that by entering when the market was bottoming out, they could enjoy some short-term gains when the markets finally went on a rise. This led to a huge wave of new and first-time traders flooding the market and trying their hand at bottom fishing. Even penny stocks were not spared, with many such stocks experiencing a never before rise in their stock prices.
Additional Read: Here are some Investment Tips by Experts for Post-pandemic World
3. Retail investors getting out of busy schedules
Nations around the world, including India, were forced to adopt stringent measures to combat the spread of coronavirus. One such measure was the string of widespread lockdowns that literally forced people to stay indoors for months. With almost the entire working population working from home, their schedules were not so busy anymore.
They suddenly had more time on their hands and consequently tried to put it to good use by getting in on some of the stock market action. Hordes of retail investors took out a part of their savings and tried their hand at share trading. This ultimately led to a record number of trading and demat account openings in the history of stock markets.
4. Retail investors looking for alternative sources of income
As a consequence of the widespread lockdowns, many businesses were forced to suspend their operations and had to suffer serious setbacks. This directly impacted the revenues of many individuals who had to contend with little to no remuneration during this phase. Some of them suddenly found themselves laid off and without a job.
Under such dire circumstances, many such individuals turned to the stock market looking for alternative sources of income. The increase in retail investor participation in the month of June 2020 is in itself clear evidence of the rise in the retail and high networth individual investors’ share in the stock market.
5. Weak returns from other investment options
In the current economic scenario, the returns offered by many traditional investment options, barring gold, have been very lacklustre. The bank interest rates are quite low and the real estate sector is struggling to get back on its feet. Considering these circumstances, more number of individuals have turned to the stock markets in the hopes of generating some short-term profits to satisfy their financial goals. This has led to a boom in the number of retail investors in the stock market.
Although there is a strong increase in retail investor participation in the stock market as of late, it still remains to be seen whether this trend would continue further. As the country and the economy slowly recovers, there’s a slight chance of these investors moving away from the stock markets and onto the more traditional investment options. But, for now, retail investors are here to stay.
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