Return of India's Retail Investor

Feb 5, 2021

Vijay Bhambwani, Editor, Fast Profits Daily

The market is on fire with the Nifty crossing 15,000 today.

But things are not the same as they were before the budget. A big change has taken place over the last few days and weeks.

The retail investor has made his presence felt in the market in a big, big way.

And this has implications for the way you trade. You will have to adapt to this new reality.

How has the market changed and how can you adapt?

Find out in the video...

Hi. In this video, I want to touch upon how the tone, the tenor, and the texture of the Indian stock market has changed around the budget time.

If I were to title this video, I would title it as the return of the retail investor. I think, and I am going to back this up with statistical data as I go along in this video, I think the retail investor has got invigorated and to a small degree before the budget, started delivery based buying and definitely after the budget, has stepped up the delivery buying.

Now this changes things from my perspective, and it also means that you're trading as both a day trader and a trader who even takes delivery for a few days and then books profits whenever they are available, both activities will undergo a change.

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Now it is imperative it is necessary for you to make adjustments along the way, and therefore, in this video, I am going to endeavour to provide you some sort of guesswork or estimates of what you can expect along the way.

If you like these videos and you think they have helped you, please subscribe to my YouTube channel and click on the bell icon to receive alerts about any fresh videos being put up out here. In the comments section I'd love to hear from you as to what you think of these videos and what you would want me to record next.

Also, it would help us to reach out to more and more people who are like-minded people who believe in knowledge based investments and trading, if you could refer these videos to your family and friends and also join me or Equitymaster's Telegram channel, which goes by the handle Equitymaster Official because at the end of the day, late evening, I put out a lot of simple but highly effective statistical data that should help you in your day trading.

Let's dive into why I think the tone and tenor of the markets will change. You see, the retail trader is radically different from your average speculator. He believes in buying in the spot segment or the cash segment, call it what you want. By cash, I don't mean he is paying rokda or do number paisa or cash money. By cash, I mean delivery segment.

Now the retail guy goes out there and buy 100, 200, 300 shares of company A, B, C, takes delivery on it, sits on it, in his demat account, sits from the stock and waits for a profit and as and when he thinks he's had his fill of the profits, sells it off, gives delivery to the broker and gets his money in the payout.

Now what really happens in the price discovery mechanism is that sometimes it's the cash market which determines the price in the futures market and sometimes it's the futures market which determines the price in cash market.

Now there is no denying the fact that both are intertwined and they impact each other very, very closely but the difference need not be in lock step. Which is why, if you were to join Equitymaster's Telegram channel, you would see why the basis of the Nifty and the Bank Nifty is changing every day.

Now the basis means the premium or the difference between the price of the future versus the cash. The cash market could go up 1% but the futures price will only go up by half percent. In that case, the basis has contracted. Same with individual stock futures also. It's not necessary that the cash market and the futures market move exactly in the same percentage terms.

So what has happened is that the turnover on an average day in this spot segment was between 65,000 crores to 75,000 crores routinely. It even fell down to 61,000 crores on 19th of January 2021 which is just ahead of the budget.

On the 29th of January, it shot up to 84,499 crores. On budget day, it went up to 87,600 crores but this is important. On the second of February, which is one day after the budget, I saw the turnover go to 100,470 thousand crores in the spot segment.

Now this is the return of the Indian retail investor. He is coming out there 15, 20, 50, 100, 200 shares but his buying and selling has resulted in a turnover for the first time of 100,470 thousand crores. Now this tells you that delivery is now leading the futures.

So there are times when the futures market pulls the delivery or the spot segment price with it but this is now the small retail investor buying shares in small, small quantities and that demand is being met and therefore the prices are going higher and the futures prices are therefore trying to catch up with the cash market price.

Now look at another metric. On seventh of January 2021, the market cap of the NSE was US$ 2.62 trillion and I'm talking US dollars but on the fourth of February, which is yesterday as I record this video on the fifth, the data that I have is of 4th February 2021, the market capitalisation of all the shares put together on the NSE is US$ 2.72 trillion.

Now that is a jump of almost 4% between seventh of January to fourth of February. That's huge and remember, we're talking in terms of trillions of dollars. A 4% rise. Now this is the kind of buying that is being sucked out from the supply of shares by the retail investor in the market. Naturally, the market is being pushed higher.

But before you start making a call to your broker and buy any share, which appears in the letters of the alphabet between A to Z, pause. Remain with me. Stay with me and here the entire video out. Now they're retail guy isn't exactly the best timer of the markets. They could sometimes and as a matter of fact, many a times buy at the peak and sell at the bottom.

And besides the retail guys and diverse, they could be millions of investors not connected to each other, buying and selling and none of them could be having the same price targets.

So a little bit of pull and push pressure on the price will keep impacting the price in the market day on day. That's the beauty of the market.

But what will happen is that the retail investor is more prone to giving into the forces of greed and fear, which would mean that the volatility or the statistical beta, which I keep mentioning in my Equitymaster telegram posts every evening, the volatility or the statistical beta is going to go up.

Which means, and the day trader the process of trying to make alpha or sheer trading profits might just become a lot more challenging because the retail guys are exerting a lot of buy and sell pressure and pulls on the market on a day to day basis.

So possibly the highly specialised intraday traders, speculators, call yourself whatever you want, need to be a lot more careful. Maybe even tone down your trading exposure so as to not subject yourself to a crippling loss once in a while.

Since the retail guys have come in, they're going to react, will not more emotionally to news and possibly even get carried away from one extreme to the other. Swing from extreme bullishness to bearishness back again to bullishness. Therefore, they could result in extreme price movement.

As long as you safeguard yourself by trading on thinner volumes, I think you're going to be just fine and remember, it's the retail guy who's fuelled the rally even in the mighty US market, which is many, many times bigger than the Indian market.

This is the return of the retail, and I wish all my viewers who are retail investors a very, very profitable time ahead but hey, let's be careful out there.

On this note, I'll say goodbye to you, till we meet again in my next video. I wish you have a very profitable day ahead. Vijay Bhambwani. Thank you for watching me. Signing off for now. Take care. Bye.

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst)

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