In India, households barely own financial assets. Equity investing is out of the question for most of them. The National Securities Depository Ltd and Central Depository Services, the two institutions that hold shares electronically, barely have 3 crore account holders.
In a country of 130 crore people, this is barely any number to be proud of. It is well over 50% in the United States.
Risk and the fear of loss
Among retail investor accounts held by stockbrokers, a sizeable number barely trades. The number could range from half of the accounts held to nearly 80%, according to industry estimates.
A typical journey of an equity investor involves excitement at the beginning of account opening. The idea is either to seize an opportunity to invest in an initial public offering or act on advice. The investor trades for the first time and creates a portfolio at the behest of the advisor. If there is an all-around rally, share price gains tend to be rewarding. However, when the tide turns or share prices fall and profits vanish in no time, the investor holds back the money.
It takes a bit of convincing of a few months for this ‘once bitten’ investor to get back to equity investing. When that happens and the new money is invested again, any losses thereafter means the investor goes into a ‘blackhole’ and never returns.
This is a primary reason for not owning equity.
Yes, equity investing carries inherent risks. You may end up buying shares when they are expensive and the market is at the top of the valuation cycle. But the root cause of this fear has got nothing to do with equities. It is primarily the lack of understanding of equity markets. The best thing for investor protection is knowledge.
How to get over the fear of loss
Understanding financial markets and the literature available to do so can be overwhelming, to say the least. Gaining knowledge about equity investing is easier said than done. Try listening to the commentary on television in the morning on business television channels or read newspaper reports about stock markets. Most of you would have emerged confused having done that.
At the same time, all those trying to promote the so-called equity cult-like stock exchanges, stockbrokers or mutual funds are creating their own content to woo you. At the back of your mind, you know they are selling their wares.
Taking small steps could be the way
- Index-based exchange-traded funds and mutual funds are a way to start. They track the performance of benchmark indices and give you returns accordingly. You can then try diversified equity mutual funds from well-known fund houses. You can learn about companies owned by these funds.
- The next step is perhaps to read about the importance of profitability of businesses. Your mutual funds are supposed to pick such companies. Share prices are a function of the profit a company makes. Cut all the other things that people talk on television or write in papers. Focus on factors that influence profits of businesses that interest you.
- The next step is perhaps to get in touch with an expert or an advisor. You may want to discuss your observations and validate them. Once you do that, you are ready to make that first trade in the stock market to own a share directly.
If you invest in a company with a consistent growth in profits, you will always make a decent return on your investment. A key assumption here is that you are investing for the long-term and that you do not need this money immediately. Equity investing is not just for the faint-hearted but also for those with an ability to hang in there for years. Only then your life could see a transformation.
(This article was originally published in The New Indian Express)