Sustainability of rising trends in stock exchange investments in India

The term “investment” in a layman’s life has changed significantly over years. If the preferred investment options were to be asked fifteen years ago, the number of people giving a nod to conventional sources like gold, fixed deposits, insurance policies, and recurring deposits would be quite high. On the other hand, five years ago, mutual funds and Systematic Investment plans (SIP), PFs, gratuity funds would too, find a place on this list. But, if we talk about the preference in recent times, especially in the post-covid world, the youths preferring stock markets would be quite high than the conventional sources of investment. The question here arises is, what exactly are those factors which are driving the upward trend in the Indian stock market?

The key driver that can be pinned for the cause, is the regulation of the stock market by SEBI and the development of trust among people. After one of the biggest scams, SCAM 1992 by Harshad Mehta, the trust of people from exchanges vanished which gradually found a way to build itself with the stringent rules and regulations imposed by SEBI in recent times. 

While the interest rates provided by banks on the FD, RD, Savings accounts have seen a fall over the recent years, households are rather looking for appreciation in the money they hold in a shorter span of time. Financial literacy has been increasing over the years and people can vividly see the opportunities that lie in intra-day trading, short-term investments, and investing for a longer period. To understand more about intra-day trading and its growing trend, we first need to know more about the types of traders involved i.e., Hedgers, speculators, and arbitrageurs. Hedgers are those who just want to reduce their risk with the hedge funds, speculators looking for profit multipliers and arbitrageurs are opportunities-seekers who buy at lower prices from one exchange and sell at another exchange at the same time at higher prices. This clearly shows the wide scope of earning money in both real-time and long term in the securities market. As a result, the conventional sources are depleting gradually, as people are moving more towards stock market investments.

It is worth mentioning that the Indian stock market recently was ranked as the world’s sixth-largest stock market in terms of market capitalization beating France, due to the 23% rise in SENSEX in 2021. The number of players has increased gradually along with the increase in demand for the stocks, thus rising the indices values. 

Dematerialization, another important factor responsible for growth in stocks, since it made it easier and convenient for people to invest and trade in the same. It’s not only the conversion of shares digitally, but the convenience that almost every brokerage firm and AMC have started offering to the costumers that is of opening a DEMAT account with the least documentation from home. Another thing is the fall in the charges of AMC and some even introducing 0 brokerage charges to a certain extent in the cases of trading.

Technology indeed had contributed seamlessly to the upliftment of various financial instruments, one of them being shares. Even a person who doesn’t belong to a finance background can search the YouTube videos related to the same and gain all the basic knowledge that is required for investments in the stock market. My mother from science background recently started investing in stock market, and the major parts of her decision flows from YouTube videos and television shows on CNBC aawaz and ZEE Business.

IPOs are no exception, a large number of youths have realized the lower risks that IPOs carry compared to intraday trading, and have started applying for the same. Those who genuinely want to make money out of it, understand the concept of “calculated risks” under the stock market. This simply means, that risk is involved everywhere, all that one needs to do is calculate it to be on a safer side. Even I as an individual, if asked, would prefer to invest in IPOs due to their lower riskiness.

This was one side of the stock market. But there are some other interesting facts, that can’t be ignored if we talk about the sustainability of the stock market. Even after having a large number of people investing in the stock market, only about 45% of the total population has contributed to the total revenue of stock exchanges in FY21, according to the data by the mint. The pandemic has surely helped in tilting the focus towards the stock market, but the real question lies here, is this transition temporary or long-term? Looking at the VIX (volatility index), a little higher value may sooner or later become the reason for the exits of various small retail investors. Even today, the rise in a number of stock market indices is driven by large companies and institutional investors. Other points of worry lie in different options for investments like derivatives and cryptocurrencies. Derivative instruments such as options and futures are nowhere behind, while the cryptos have successfully targeted the youth. 

Summing it all, we can say that there are threats to the long-term stability of stock market upward trends, but there are reasonable arguments too in support of the same. Of all the key factors that drove the country towards the stock market, almost all of them may soon become reason for people to shift towards other investment options.

-Vishakha Khandelwal