What happens if 80 crore Indians invest in stock markets?

Looking at the current situation where active investments are less than two crores in the equity market, this figure appears to be hypothetical only. If at fortnight, some magic things happen and 78 crores people join the stock market with a magic wand. It’s hard to predict what will happen to the stock market. The volatility may increase, as there will be more buyers and sellers at the same time on a sudden note. High market volatility levels carry huge risks as well as great rewards.

Sensex and Nifty may cross-unimaginable figures like in millions or fall miserably. The market may not be able to handle such amount of data and may crash or gain a rally. The small-cap will become large-cap and the large-cap will become jumbo cap in terms of market capitalization. 

Almost all major companies across the world would want to list their company on the Indian stock exchange. The stock market is a substitute for the economy, the idea of capitalism will be promoted. Businesses will flourish, and small Indian companies will go globally and become giant companies. Again, in the end, all these statements are imaginary only.

However, this would not be an appropriate picture to explain and hence it is not a fair representation.

In India, investing or trading in the stock market is perceived as gambling. Many people do not want to invest in the stock market due to social and psychological factors. Normal Indians keep themselves away from the equity market mainly on account of the trust factor and prefer traditional methods of investment like gold or fixed deposits which are considered safer in the longer run.

After independence in the last 70 years, only 2 percent of the population have joined the stock market and distribution of trading volume is largely in cities or in a certain state like Gujarat and Maharashtra only also a large portion of this figure have joined only after the opening of the Indian economy in 1991. The stock market participation inequity is higher in developed economies like the US (50%), China (7%), etc. There is a mismatch between equity pricing and the economy.

Located in Mumbai, the National Stock Exchange (NSE) established in India in 1992 is the largest stock exchange in the country and has more than 1,750 + listed companies whereas BSE established in 1875 has more than 5700 companies. NSE has rapidly developed to become one of the top three stock exchanges by transaction volume in the world. Around the same time [in 1992], the Securities and Exchange Board of India (SEBI) came into the picture.

The evolution of the regulatory climate was central to the progress of the NSE. Markets will only expand if the economy is growing, and LPG Liberalization, Privatization and Globalization model [introduced in 1991] has helped grow the Indian economy, as well as companies that have gone public in order to raise money. In addition, liberalization allowed international flows.

India's economy is doing well. Its growth rate ranged from 6.5% to 7.5%, a healthy rate compared to every other economy, including China's (Except for current conditions due to the pandemic and other factors). The inflation rate has been between 4.5 and 5 percent, which is considered a healthy sign for any developing economy. When more people will participate in the market, there will be a gradual shift in the economy, businesses will flourish, GDP will increase, the market will expand, etc.

India needs to have strong financial markets to become a developed economy. In the last 20 years, Indian capital markets have grown significantly in terms of risk management, operations, penetration level, etc. SEBI, the government, market participants, has to come a long way forward, create awareness, and win trust among people so that new investors join the stock market. There is a perception among Indian people that the stock market is gambling.

However, retail investors bet on the 'greater fool hypothesis,' or worse, the 'fear of Missing out or FOMO factor than on a reversal or fundamentals of earnings. Overnight expectations don't alter. It takes sustained effort, and it needs to be proven by actions.

Trust in markets needs to be established. Things should be rather simplified. Only with more investor knowledge and awareness, as well as with simpler products, whether they are ETFs (exchange-traded funds), mutual funds, or other products, will the penetration level increase. According to a survey conducted by Central Depository Services Limited (CDSL), the majority of investors in Indian equity markets are male investors, while the number of female investors is quite low.

Transparency and the fact that well-regulated markets definitely boost confidence in markets, both at domestic and as well as international markets. It is necessary, too, to develop new markets. The fixed income market or commodity market, for example, is at a nascent stage.

To promote understanding of markets and market-linked goods, the exchanges and SEBI have taken several steps. Moreover, recent government measures to expand the bond market, such as retail investment in government bonds, are a significant development. Earlier the retail investors try to time the market, but regulatory bodies have brought a structural change in the asset industry hence it is a much-needed welcome step. 

The discussion for the development of the Indian stock market will go in a long way and it’s the duty of everyone market participants as well as regulatory bodies to come forward and participate and bring a developmental change.