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Who are the Robinhood Traders in the Indian Stock Market?

Editor, TRANSFIN.
Jul 29, 2020 3:54 AM 5 min read
Editorial

India’s COVID-19 curve isn’t the only line that’s edging upwards these days.

Here’s Sensex in the past six months:

Who are the Robinhood Traders in the Indian Stock Market?And here’s Nifty in the same period:

Who are the Robinhood Traders in the Indian Stock Market?As you can see, both these benchmark indices have recovered most of their losses since March. Just like many of their global peers, the Indian stock market has been rallying strongly.

But how is this possible? After all, aren’t stock markets’ performance intricately tied to the state of the economy? And right now, the Indian economy is in an unenviable position and is bracing for tough times ahead. What explains the bulls, then?

The answer isn’t shady government intervention like what’s been happening in China, but something less dubious than that. Contributing factors include the various support packages by the RBI and Government, the possibility of more liquidity measures in the near future, low interest rates, rallying of stocks of large cap companies (like RIL), and hopes for the swift development of a coronavirus vaccine.

(Of course, another way to look at this is arguing that we’ve reached a point where stock markets are completely detached from economic and business reality.)

Another factor that is likely aiding the market’s ascent is the surge in the number of new retail investors. Not the institutional or big-shot, high-flying kind. But common citizens, working and trading from home, many of whom opened trading accounts for the first time only recently.

 

Enter, the Robinhood Trader

You may have heard of Robinhood, a commission-free trading app that is geared toward millennial investors. Its soaring popularity gave rise to the term “Robinhood trader”.

Who is a Robinhood trader? He is a newbie to the world of stock trading. The coronavirus lockdown forced him to stay at home for months. His savings rose as he cut spending on things like travel, entertainment, commute, shopping etc.

Stuck at home and with some money to move around, he turned to the internet to learn about stock market investing to make a quick buck. A Google search, a few YouTube tutorials and perhaps reading “Trading for Dummies” equipped him with the basics about the world of investing. The long list of easy-to-operate brokerage apps meant that he was spoilt for choice. And the sea of commentary on stock fortunes on Twitter meant that he had access to market grapevine.

 

Robinhood Rising

Such investors have proliferated in India - and globally - due to stay-at-home and work-from-home orders. Discount brokerage Zerodha reported a 300% bump in new monthly account openings since the start of the pandemic. Motilal Oswal saw downloads of its mobile app double and digital trades surge 50%. IIFL and Angel Broking say monthly client additions have doubled since March.

More than 2.6m new accounts have been opened with the Central Depository Services Ltd (CDSL) since March, including a record 830,405 in June. By comparison, the average investor addition by CDSL in 2019-20 stood at c. 300,000 a month. All in all, the share of non-institutional retail investors in the cash segment rose to 68% in June - the highest in a decade.

 

Robinhood Traits

There are some characteristics that are common amongst most - if not all - Robinhood traders. 

  1. They are young - most of them are Millennials.
  2. They are internet-savvy - they trade at ease online, aided by a competitive brokerage market with very low commissions and barriers.
  3. For many, trading is a part-time occupation, something borne out of the need to save more for a rainy day or simply borne out of boredom.
  4. While they don’t make big bets like institutional or foreign portfolio investors, they have strength in numbers. Of the 615 companies that have announced their June quarter shareholding thus far, 68 reported an over 100 basis points hike in stakes by individual shareholders.
  5. Many of them are invested in low-cap and highly volatile stocks that are cheaper to buy and may be riskier but offer higher returns.
  6. They’re not exactly value investors. They hold their trades for a short period of time, for a few hours or days, so as to secure quick returns.

 

Robinhood Bets

These fledgling traders’ frenzied buying has pushed small- and mid-cap companies’ prices up, granting them an attractive profile. This means they could end up investing more in the market and getting their friends and family to join the game, sparking a domino effect.

Robinhood investors have propelled these small companies to outperform their blue chip counterparts. In particular, they are piling their money onto “penny stocks”, which are stocks that quote below ₹5. Thanks to them, a custom index of 800 penny stocks has trounced Sensex by 36 percentage points this year. In June alone, the former climbed 10 times faster than the benchmark index.

The trend of Robinhood investors is not unique to India. Net retail flows in South Korea and Malaysia have reached the highest level ever. Japan, Thailand and the US are also reporting a flush of new retail investors.

 

Robinhood Risks

Financial inclusion is an objectively good thing but with a sudden surge of this magnitude there are risks involved.

There’s always the danger of a stock market bubble forming. The custom index of penny stocks we talked about earlier? A fifth of the companies on that index have zero revenue. But still their prices have surged, with some doubling or even quadrupling in market value. And as we all know, a bubble may remain afloat for a long time, but it is bound to burst sooner or later.

Then there’s the risk to the Robinhood investors themselves. It takes a lot of commitment and time to master the art of trading and investing. And despite what the indices may indicate, we’re still in the midst of a pandemic. Uncertainty abounds. A market crash or slump now would mean millions of people would lose their savings and suffer losses.

Many novice traders may not even be aware of the risks involved. They might be lured by the apparent ease of digital trading. A flashpoint was the suicide of a 20-year-old trader in the US. He had no income source but was still able to engage in high-profile trades that ended with his Robinhood account’s cash balance showing a loss of three-quarters of a million dollars, which led to him taking the extreme step.

FIN.

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