Households will not, and should not, resort to stock trading as their tool to manage surplus funds

It’s time that the stock market is made accessible to retail investors without the risk of punting or trading Many retail investors are still unable to deftly book losses and keep the focus on the capital and its protection. They are still product-oriented and care more about the rate of return. When capital loses value, they still find it tough to book a loss and redeploy

Uma Shashikant

Uma Shashikant


Chairperson, Centre for Investment Education and Learning
We were in Ahmedabad in early 1989, working on a research project on equity investing in India. The stock markets had briefly surged in 1988, leading many to feel optimistic about another bull market. After the heady rise of 1985 and the dismal crash of 1987, the markets needed a reason to cheer again. The Sensex was at 330 that January. The frail, middle-aged man, who was photocopying some of our drafts, was frequently going out to talk to friends. He was punting on the markets and was bullish about the IPOs. We had a live case study on the equity cult that was the subject matter of our work, and we talked to him.

#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} He ran a business on the side, along with his wife and brother-in-law. They traded used spare parts for trucks, collecting them from mechanics and reselling them after minor repairs. They began with a small capital in their backyard and now had enough business to roll stocks and funds efficiently. He would punt on the markets any surplus from the business and made a tidy amount from time to time. Didn’t he make losses? Wasn’t this risky? He told us that he would be fine as long as he knew when to book profits and losses. The money must keep rolling, he told us.

Those were the early years of stock investing and learning for me, and 1989 turned out to be a good year. However, that is not the point of this story. I spent a lot of time interacting with small businessmen and traders on my job, and many showed three common traits. One, they used the stock markets like a treasury operation. Two, they reinvested most profits back into their businessses. Three, their long-term assets were gold and property. This pattern stayed in my mind, and I would ask small businessmen about how they managed their business finances.

The first trait was unique to the trading community of western India. In the early 2000s, I recall a meeting in Rajkot about the investment opportunity in debt markets. No one was interested in interest income and began to pay attention only when I talked about bond prices changing with changes in interest rates. They did the math and told me that a low double-digit yearly return was inadequate. These regions have always had equity investors, but with such audacity that they use equity (now derivatives) purely for short-term gains.

The other common thread with respect to short-term investments is the informal lending and borrowing within the community. They always knew that short-term surpluses and needs were part of the business finances and found it easy to lend and borrow among themselves. If someone defaulted, he would be out of the system and unable to access the markets. In those days of cash transactions, there were pockets in the city where ‘petis’ were exchanged at usurious rates, but in complete confidence. Large businesses had formal arrangements, published balance sheets, and had market access. Others stuck to their informal channels.

Now that we have electronic transactions, the turnover of small businesses is available for verification. Instead of seeking informal sources at high rates or taking on risky speculation, many businesses should be able to access formal sources. The growth in the non-banking financial sector, micro finance and micro banking has changed some of these equations for the better. That story must wait for another time.ansactions, the turnover of small businesses is available for verification. Instead of seeking informal sources at high rates or taking on risky speculation, many businesses should be able to access formal sources. The growth in the non-banking financial sector, micro finance and micro banking has changed some of these equations for the better. That story must wait for another time.

The question I want to ask the readers is: what does the household do with respect to short-term finances? We have no data to talk about the history of household personal financial management. However, we live in modern times where access to formal finances is available freely. Has that modified how households treat their surpluses and deficits in the short to very short term?

What are the choices for someone with extra funds in the bank account? Households will not, and should not, resort to stock trading as their tool to manage these funds. Many retail investors are still unable to deftly book losses and keep the focus on the capital and its protection. They are still product-oriented and care more about the rate of return. When capital loses value, they still find it tough to book a loss and redeploy. Do they choose liquid funds or short-term funds offered by mutual funds? These products invest in the short- to very short-term markets to generate return. These products are not very popular among retail investors. Those conversations are mired in tax aspects and the need for a longer holding period, defeating the purpose. Do investors book bank fixed deposits? That does seem to be a popular choice. Most choose to let the money lie in the savings bank accounts before they can make an investment decision.

That might be sub-optimal. To see why, consider what happens when a household is in need of funds and is not in surplus. The credit card is available, but is very expensive if the borrowing period is longer than the billing cycle. Personal loans are available, but compare the rate to the savings bank rate, and you know that the spread is large. Loans against assets like gold, bank deposits, mutual funds, stocks and bonds are widely available, but the margins and rates are high. The spread between what the investor makes by letting his money be used by the bank and what the investor pays while stepping into the same market for funds is steep. We call this access premium. Access to very short-term market is available to retail investors to borrow, but not lend, because that market is completely run by institutions and their huge wholesale treasury operations.

When we speak of retail investing, we mostly talk about equity. Given the retail consumption and spending trends and evidence of surplus all around us, this market must also be available to the household. Without the risk of punting and trading.

(The author is CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING.)
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances