If someone at the start of 2020 would have told you that, the stock markets will fall by 30% and then recover within the next 6 months! You would have laughed it off.

The explanation is quite simple. The investors panicked at the start of the pandemic. And now the markets are fairly confident that everything will come back to normal, as suggested by the latest bull trend.

This has been puzzling at the very least. We are heading to the worst economic crisis since the Great Depression. But the stock markets are enjoying a particular euphoria. The large fiscal measures by governments and liquidity injections from Central banks have kept the markets “artificially” happy.

In this article, we are not going to comment on whether the markets are overpriced. Also, we sincerely hope you’ll not act on your portfolio based on this! Now, you know what this article is not. What you can expect from this issue is we’ll discuss how the retail investor behavior has changed in this pandemic and how the brokerage platforms are leveraging that opportunity.

We’ll start with a rather strange yet very interesting trend that has driven the stock markets crazy!

Buy Low Sell High

The pandemic has attracted a large (very large) number of retail investors (like you and me) to invest in stocks. Matt Levine has an interesting hypothesis on it – ‘Boredom Market Hypotheses’. He writes that in the lockdown – A lot of amateur traders (the first time retail investors) have flocked into stock markets due to sheer boredom. The entertainment options are now limited. In lockdown, they have a lot of free time. And they are looking for quick money. It so happens that a stock market is a perfect place for them.

The stock market is flashy. You can see your stock going up and down all day. It is ‘the’ place to make a quick buck. Particularly during the pandemic, when the market hit an all-time low – it presented them an opportunity to invest in the stocks which were earlier priced way too high. And the investors have been quick to ‘cash’ onto this. Matt Levine has noted two particular trends –

  • Stocks that go up are fun! The more a stock goes up, the more volatile it becomes, the more attractive it is to new investors! The Tech stock rally perfectly summarized this, as the retail investors in the US have piled up the big techs.
  • The investors loved the stocks which have gone down a lot! “Hey, I’m going to try that $1 stock: A near-bankrupt company”. It’s a fun gamble. If the stock goes up – hooray! You might have made 5 times your investment. If the company goes bankrupt – who cares! It was worth pennies anyway. (fun fact: these stocks are called Penny Stocks)

To summarize the Boredom Market Hypotheses – The best and worst-performing stocks are fun! The other neutral performing stocks in the middle are boring.

Majority of these first time American investors have joined Robinhood (America’s Zerodha). And the activities by Robinhood Investors have left market veterans baffled! Lately even the phrase – Robinhood Investor – is being used quite a lot with certain annotations attached to it.

“Robinhood Investor” – A newbie rookie investor

So, India saw a rush of its own set “Robinhood Investors”. Many penny stocks have seen a major bullish trend hitting daily circuit filters. And some of these stock prices have grown by 5x in the last couple of months.

If we take a closer look at the Indian market, more than 30 lakh new customers have opened Demat accounts with Central Depository Services since February. Equity market saw retail participation peaking to a 15-year high in July. Of the 615 companies which have announced their June quarter shareholding data thus far, 68 saw incremental 1% stakes by individual shareholders.

Riding on the Investment Wave

India has one of the lowest retail participation in the equity market. In 2018, India’s equity market penetration was just 2.5%. The Indian consumer has relied on traditional investment channels like gold, real estate and bank deposits. The trends are changing. India added around 50 lakh new Demat accounts in FY 2019. Increasing awareness in the equity market, more money at disposal for investments and the massive bull run of the Indian market have contributed to this surge. Though the biggest reason of all is the rise of tech-enabled discount broking platforms like Zerodha and 5paisa. They have massively reduced the broking & transaction fees and have made equity investing much easier for an average Joe.

The latest factor contributing to ever-increasing retail participation is the prevailing pandemic. Brokerage firms have been quick to cash on this surge and are expeditiously adding new customers. Owing to higher participation and more volatility, trading volumes for exchanges and brokers are up at least 40-50 percent.

Zerodha, India’s largest brokerage firm in terms of the number of clients, is adding around 2 lakh new customers every month since March – 100% more than the previous year’s growth. That means nearly 30 percent of its total customers were added in the last four months! After revolutionizing the brokerage industry, it is now eyeing to expand its base to wealth management and investment advisory services curated for first-time investors. Before discussing more about this, we’ll briefly touch upon what makes Zerodha stand apart.

Doing it the Zerodha way!

Brothers Nithin and Nikhil Kamath launched Zerodha in 2010 and introduced the discount brokerage model in India. This offered not only the ease of account opening but also brought down brokerage charges to unprecedented levels that helped a startup beat the big banks who more or less controlled the brokerage industry then.

Instead of aiming growth-at-any-cost, the duo has focused on building a sustainable business with a ‘low-margin and high-volume’ model. And this strategy has paid off very well. The low-cost solid product and customer-centric approach helped them emerge as India’s top brokerage firm without any direct marketing. They achieved all this without raising outside money throughout the journey! Currently valued at Rs 7,000 crore (nearly $1 billion), it is one of the rare profitable fintech startups to achieve the ‘unicorn’ tag. The number could have been higher if Zerodha had been valued as a tech firm, rather than as just a brokerage firm.

Indian Brokerage Industry

Most of the Indian brokerages have sharply shifted their focus to young customers and are racing to provide them with tech-focused products.

For example, Varsity, the education initiative by Zerodha has helped them attract millennials. They are now betting on an asset management company named True Beacon. Unlike traditional mutual funds which charge annual management fees and exit load (penalty charged if an investor exits in the lock-in period), True Beacon focuses on client-friendly model and charges only one time 10% carry (fees charged on profits made at the end of the year). Zerodha also plans to set up a NBFC and a mutual fund in the next few years. And Zerodha is not alone in this. The majority of brokerages have also entered the game.

Angel Broking offers an algo-based stock recommender called ARQ – its flagship tech product for retails investors. Motilal Oswal has introduced robot underlined products for a curated portfolio review in real-time and one-click execution. It also has Intelligent Advisory Portfolios at a fractional cost. Sharekhan provides quantitative model-based advisory and portfolio management services.

So what’s next?

Online brokerages are building a powerful ecosystem of tech-enabled investment products. Apart from traditional services, we will see them offering robo-advisory services and a variety of fund-based services curated mutual funds and loan offerings. Many online brokers are providing educational content to lure inexperienced investors. Zerodha, for example, has recently partnered with Finshots. Some are gamifying trading with leader-boards, competitions and other incentives, and we expect this to become more important in the future.

Investing, which once used to be a boring and unintelligible process, is now becoming more exciting and addictive. Like Robinhood’s cash management feature, we may see online brokers offering services like trading, deposits, loans, bill payments and even debit cards, all through a single account. In the years to come, the biggest payments bank or NBFC may well be the one among these brokers!

And what’s in it for us? Well, as a retail investor, we will benefit from a customer-focused approach, curated services and market competition. At the same time, the investor empowerment will ultimately help Indian markets achieve higher penetration levels.

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