Mumbai-based Sahaj Shankar has just experienced the sweet intoxication of rising stock market. His investment of Rs 25,000 in options turned into Rs 4 lakh in 30-40 days. Working as a marketing researcher with a UK-based firm in Mumbai, 32-year old Shankar has some free time during the lockdown. He is excited about minting more money. "I had to cool him down saying, this doesn't happen every day. This is the market where Rs 1,000 payoff has become Rs 4,000. Speed at which the money is growing is drawing the people to stock trading, but if the direction of the speed changes, the rate of destruction will be speedier. This is what they must understand," says Sacchitanand Uttekar, DVP - Head-Technicals & Derivatives at Tradebulls Securities (P) and Shankar's client.
Shankar is not alone. A lot of millennials cooped up at home, even from tier-II and tier-III cities have turned to the Dalal Street for alternative source of income. In just two months of FY21, CDSL opened 11.5 lakh demat accounts compared to 38 lakh accounts in entire FY20. The number of active clients on NSE rose by 8.2 lakh to 1.16 crore in just two months. By comparison, the stock exchange had added 20 lakh active clients in entire FY20. Trading volumes of NSE and BSE combined have also grown 35 per cent between February-end and now, data from financial markets data provider Refinitiv showed.
"Normally when the market crashes retail investors run away. This is the first time I have seen that retail is coming towards capital market in a big way. New customers opening demat accounts have gone up more than 100 per cent. Even existing investors are investing more money and are more active now," says Prakarsh Gagdani, CEO, 5Paisa.com.
The worrying part, however, is most of them here are not for the long-term. The speculative trades with no connection to fundamentals are rife as is evident from sudden spike in penny stocks. Stocks like Sintex Plastics, Sintex Industries, JMT Auto, Cox & King and Reliance Power are up anywhere between 300-500 per cent since March lows. Meanwhile, inflows in equity mutual funds, which denote long-term investment, hit 46-month low in May 2020.
'Robinhood' traders in global markets
The trend is similar in the global markets. Data released by the Australian Securities and Investments Commission (ASIC) shows that the number of unique clients has surged between February and April, and at the same time the average holding period has shortened. "The average stock holding period for retail accounts fell to less than one day, compared to more than two days previously, denoting more speculative transactions. Meanwhile, the new retail account creation during the same period grew 3.4x faster than the usual, prompting regulators to even issue a warning," says Kunal Sawhney, founder & CEO at Kalkine, a Sydney-based equity research firm.
Sawhney further points out that in the UK, according to the Individual Shareholders' Society (ShareSoc), during March-April 2020, about 20 per cent of the trading volume in the FTSE All Share index came from retail shareholders. "It is higher than the usual. The retail stockbrokers and investment platforms also reported a strong retail trading volume coupled with strong new customer addition".
The United States emerged as the poster boy of the surge of such 'Robinhood traders' and what destruction it may entail when a 20-year old student Alex Kearns died by suicide after he witnessed a negative balance of $0.75 million in his Robinhood account. This was the moment of reckoning for traders in the US, as it should be world over.
"Alex traded into complex option instruments which he never had any knowledge about. This was classic example of why one should be careful of investing in complex derivative instruments. Investment in these complex instruments should be left to the professionals or should be sought under the appropriate guidance; and retail investor should not try and explore these without adequate knowledge," says Sawhney.
If you have to trade in the stock market, we give you a basic understanding of dos and don'ts:
How to start trading in the stock market
Broadly, three types of trading happen in the stock market - intraday, delivery-based trading and trading in derivatives (future & options).
In intraday trading, you buy and sell the stock the same day, while in delivery-based trade you take the delivery of the stock keeping a relatively longer time horizon to earn returns. In future & options, you buy big lots on margin money to make the most of volatility in the cash market. Most brokerages give you up to 10-20 times margin (leverage) to play into F&Os. The Sebi in fact reduced the margin requirement for hedge positions, which is working in retail investors' favour.
"The interest of young investors in derivative segment especially in hedge strategies has grown after Sebi reduced the margin requirement by almost 70-80 per cent. It makes it very easy for small investors to try hedge strategies," says Gagdani of 5Paisa.com.
This easy availability of margin money, coupled with surge in technologically advanced discount broking firms, and lower transaction cost than the cash market is drawing investors to F&Os, even as they don't understand the concept of derivatives fully.
This is where the trouble begins. While it is enticing to invest more than what you have in the stock market on leverage, if the tide turns, you will lose much more than what you have deployed in the market. So, if you are a novice, it is advisable to stay away from intraday trading and F&Os and start with delivery-based trade.
"Stock market and especially price movement is really very exciting to see. Young investors often get carried away with thrill of volatility and take a lot of leverage to earn easy money but eventually lose all their capital. I strongly recommend young investors against this," says Gagdani.
If you have to take a crack at intraday and F&Os, then start small. "Focus on a maximum of one to two stocks during a session in the beginning, but stay away from penny stocks while looking for deals and low prices. Always think about the risk first and then about the returns," says Jashan Arora, Director Master Capital Services.
"Once you gain confidence about the nature and working of these instruments should you look to increase your ticket size. It's recommended to take expert advice in the initial phase of your trading journey".
Ghanisht Nagpal, convener of the Delhi Investors Association says leverage is not good for anyone with a portfolio size below Rs 25 lakh, but if someone still has to go for it, start with leveraged positions in the cash market. "Use a limited amount of total account size for leverage trading. It's good to start with leveraged cash trading than futures and options. Investors can also balance their leveraged positions by taking cash positions to lower risk. Secondly, always have a stop loss in mind before taking exposure to any position," he suggests.
Ultimately, it is about understanding risks and playing it safe. Avoid putting in your hard-earned money in the stock trading to earn income. Do it with the surplus amount which wouldn't hurt your survival if, god forbid, you lose it.