Indian savers’ parcipatition in equity markets has grown manifold over the past few years as indicated by the rise in demat accounts, now well above 100m. Part of the reason is the structural trend of financialisation of savings in the country away from the historical affinity with real estate and gold as default asset classes. Part of it is also the sustained returns in the Indian market since Covid. Increased retail participation in stock markets during Covid wasn’t just an Indian phenomenon with even the US seeing significant surge, only to die down after the 2022 correction. However, there seems to be other factors that are contributing to the Indian scenario as highlighted in this brilliant note from Axis Mutual Fund’s CIO Ashish Gupta. He calls it the gamification of Indian equities. At the centre of it lies the growth of derivatives as a predominant way to trade the market. Ashish notes that derivatives contribute 99.6% of volumes in the Indian market, significantly greater than the 70% in the US.

“Originally designed as a tool for hedging risk, derivatives are now a tool for taking risk.”

What has driven this?
“Change in contract structure, leverage combined with the ease of onboarding and interface of the new generation trading apps has triggered gamification of this market with number of active derivatives traders jumping 8 times to 4 mn from less than 0.5m in 2019. In comparison, in the cash market, the number has grown 3 times – from ~3mn in 2019 to 11 mn.”

There is a significant change in the demographics of the average Indian trader with ease of access through online trading apps attracting the younger generation, also seeking instant gratification.

“The average age of an equity retail investor is 35 years, whereas those with digital discount brokers is 29 years, similar to 31 years for online gaming companies. Notably, half of the new customer additions are below 25.”

Also change in contract structures offering smaller ticket sizes has attracted traders from smaller towns.

“For example, Angel One, saw its customer count increase by 4.6 million in FY23, with 90% of gross client additions originating from Tier 2 and 60% from Tier-3 cities. Geographically, most new investor additions are from North and West India”

Why should this be a concern?
Change in contract structure with shorter duration contracts also effectively increases the leverage in any trade i.e, a small bet can have outsized returns or massive losses.

“At an individual level as well, given the embedded leverage – the loss of capital can be significant even when buying options. This loss can be manifold of the initial capital when dealing with futures or selling/writing options. Given, that India’s Volatility Index today is at multi year low, option writers risk complacency and sharp market moves can lead to significant retail losses. A recent SEBI report highlights 9 out of 10 traders lose money, with ~`56,000 loss per person on average”

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