Before the covid-19 pandemic, the stock market was primarily untouched. There was only a dedicated group of retail investors, along with many foreign institutional investors (FII) and domestic institutional investors (DII).

Mainstream media and public knowledge revolved around the risks associated with the stock market while staying oblivious to the opportunities to build long-term wealth.

But in 2020, the number of retail investors achieved a sharp spike. The number of active demat account holders rose by 1.4 crores, a figure higher than the previous three years. At a time when businesses shut down and people’s livelihoods were impacted, what could have been the possible reasons for an influx of investors in the stock market?

Stay with us as we explore the rise of Indian investors and look at the factors that led to a sudden shift from traditional investment avenues.

The Shift to Stocks: Reasons that Contributed to this Trend

When you hear of investment options in an Indian household, you will notice the words ‘gold’ and ‘real estate’ being tossed around constantly. It is no surprise that these are some of the most popular options since they have historically been known to appreciate in value, albeit gradually.

Unfortunately, investing in these avenues requires high capital, preventing them from being the go-to option for everyone.

While the gravitation to the stock market may seem abrupt, it was caused due to several factors, starting from retail investors looking for alternative options. The shutdown during the pandemic gave them more time to research and find a way to address their dwindling savings, leading them to discover the ins and outs of the stock market.

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Additionally, the following factors may have affected their decision:

The low repo rate made it difficult for banks to offer higher interest on fixed deposits, limiting the earning potential of several individuals.
More global liquidity in the market meant that buying and selling assets in the stock market was easier.
Salaried people with consistent earnings possessed more disposable income without opportunities to go out.

Combine these factors, and you can understand why retail investors diversified into stocks.

The Current State of the Indian Stock Market

India has seen a significant rise in stock market participation. As per a report by Business Today, the number of stock market investors in India increased to around 87 million by January 2024, compared to just 17.9 million in 2015. Maharashtra leads with 17.4% of the country’s investors, making it the state with the highest share. Additionally, 17% of Indian households now invest in the stock market, highlighting the growing interest in stock market investments across the country.

The number of demat account holders in India continues to skyrocket, with 11 crore accounts in January 2023, compared to only 8.4 crores as reported in 2022. Even with these massive figures, it is estimated that only 3% of Indian households are actively investing in stock market till 2023.

However, India lacks behind in the number of dedicated retail investors compared to the performance of other countries. Here are the numbers from other countries to put things into perspective:

United States of America - 55%
United Kingdom - 33%
China - 13%

Fortunately, the market trends have indicated a step in the right direction. Until 2019, the net selling of stocks was higher than the net purchase, signifying that more retail investors were selling their shares, hesitant to buy more.

But as soon as 2020 rolled over, there was a noticeable increase in net purchases, resulting in a net inflow of INR 51,200 crore. This simple change in investor behavior proved that individuals are getting more comfortable with the stock market and parking significant disposable income in shares.

But a large portion of the contributions seems to be from two major cities, as reported by the National Stock Exchange. Mumbai and Ahmedabad investors are said to have a dominant hold over the market, contributing to 80% of the total trading value occurring on the exchange. Separately, Mumbai contributes 67.8%, while Ahmedabad provides 11.4% of the total cash turnover in NSE. The next city on the list is Chennai at 5.1%, followed by Delhi at 4.6%.

Is there a reason why other cities have low trading volumes? Let’s find out.

Reasons for Limited Stock Market Participation Among Indians

Visualize a scenario - your family has traditionally invested in land, real estate, and gold. These three options have provided promising returns over the years, and the bank FD you created three years ago has finally matured.

In this case, if a trusted relative or acquaintance intimates you about the stock market and its associated risks, how likely are you to immediately jump on the idea?

You might still be willing to take the risk if you have more disposable income. However, individuals who can only save a fixed amount will be more reluctant to invest in the stock market. After all, they could lose all their investment.

An unfamiliarity with the stock market makes them more risk-averse toward the space, ultimately impacting their decision to avoid investing in stock market. Additionally, the stock market rewards patience and requires a commitment longer than FDs or gold.

Why Investing in Stock Market?

It is a fact that the stock market is not the safest investment avenue in the Indian financial space.

But think about it - the average inflation rate in India is believed to be 7.5% per year, according to observations from 1960 to 2021. So, if an item was worth INR 100 in 1960, it would be worth around INR 7,804 in the present.

Now, consider the average FD rates across top Indian banks. According to Clear Tax, the interest rate per annum on fixed deposits hovers from 1.85% to 6.95%, which is less than the inflation rate. So, when you park your money in traditional fixed deposits, it barely appreciates in value. Not to mention, you are required to commit to a lock-in period.

The stock market, despite its fluctuations, can offer better interest on your investment, provided you invest after extensive research and observations. Start with small sums to observe the market sentiments towards particular stocks before committing a lump sum to ensure that you find a profitable company for your investment.

The best part is that it is easier than ever to trade in the stock market, given the advent of reliable online stockbrokers like Choice India. The platform offers an easy trading and demat account opening feature to help you start your journey as quickly as possible!

Summing Up

There’s no doubt that Indian investors have gained more familiarity with the stock market. You will find several active users engaging in long-term buying or short-selling stocks in line with the market behavior to book immediate profits.

Technical analysis is easier than ever with the help of several free resources on the internet, making it one of the best times for retail investors to take their first steps into the stock market.

However, the first step involves the creation of a Demat account using an online stock broker platform. Bank on only SEBI-registered brokers like Choice India for a hassle-free account opening process, and gain access to your own personalized dashboard to track, buy and sell shares.

So, join a large number of Indians and capitalize on the benefits of the stock market today!