The surge of small investors into the stock market has been one of the defining financial stories of the last several years. People who monitor the NSDL Share Price often connect it to the rise of first-time investors. Those who observe the CDSL Share Price make a similar link, noticing that periods of intense retail activity usually coincide with stronger business numbers. This article explores how the retail wave affects depository institutions, and what it means for those who invest in them.
The Rise of the Everyday Investor
Not long ago, equity investing was the preserve of the leisured and moneyed. Today, it is the salaried, the stay-at-home mom, the student, and the small-time businessman, all investing via apps on their mobile phones. The democratisation has been made possible by systematic investment plans in mutual funds, direct equity, and public offers, to name a few.
This has led to an explosion in the number of demat accounts, each of which is potentially a source of income to the depository since every traded security has to be held in a demat account.
First Principles: Linking Activity to Income
A depository’s income is in part driven by the number of accounts and securities held; importantly, it is also a function of transaction volumes. When volumes were at their peak in the last fiscal, the income from transactions was at its highest too. New account openings and credit to depository accounts on the back of initial public offerings (IPOs) boomed during the same period.
By contrast, when activity declined, so did income from transactions. At the same time, since a depository’s income is partly steady-ish (recurring income from accounts and securities held), the drop in income from transactions explains the sequential fall in profits.
The question of sustainability is vital here. There are reasons to believe that both cyclical and structural forces will contribute to a lower growth rate in accounts. At the structural level, the tailwinds include ease of opening accounts and rising literacy and income. The pullbacks in cyclical factors such as a strong bull run and FOMO will also dampen account openings.
At the same time, prudent investors will realize that assuming that the current levels of euphoria will be sustained at all times is dangerous.
Many new investors tend to start small and learn as they go, and while some of them may be disciplined, others could find themselves chasing volumes and moolah, only to quit the game eventually having lost money. Market sentiment plays a role in the composition of the retail investor base, too, with a sizeable chunk of retail investors in derivative products and speculative trading losing money.
Regulators are already pushing for awareness campaigns and disclosures to counter such practices. A more informed set of investors who are in it for the long haul and not just a quick buck would help everyone, myself included.
By the same token, the competition for these investors is intense. Brokers and fintechs are at the forefront, and the depositories are right behind them in terms of technology infrastructure. Depository services should be fast, reliable and uninterrupted as millions of transactions go through these systems every day. Any hiccup impacts a large number of investors.
Firms that have the technological heft to scale during such periods of heightened volatility usually emerge as winners. It’s instructive to keep a close eye on how such a firm navigates through peak hours or during big-ticket events like IPOs.
Things to Watch Out for These Firms
Look out for sequential growth in the number of new accounts, total accounts, and volume of transactions. Cross-check with revenue growth. If the latter is lagging, understand why. It could be that a large number of new accounts are cash accounts that do not generate income directly.
Make sure to understand the macroeconomic backdrop: where are rates headed, what about inflation, and how are they impacting the propensity to invest?
A Weak Economy May Hurt Everyone
The boom in retail investing is great for everyone in the value chain, but it’s not a given. Keep a close watch on macro forces as well as the dynamics at the firm level, and temper your enthusiasm.
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