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Friday, November 23, 2018

Why do most Indians not invest in the stock market?

Let us first focus on some numbers
  1. Indian population according to a simple google search is 133 Crores or 1330 Million
  2. Unique bank accounts till date 20 Crores or 200 Million. Just 17% of the total population.
  3. People investing in Mutual funds, equities, bonds and similar instruments is mere 2%.
Now the reason I gave these numbers is that not many individuals even have an active bank account, don’t even consider the savings amount. Being of conservative nature fewer people invest in stock markets. Let’s see what is causing this.
When Mr Narendra Modi became the prime minister of India in may 2014, the whole of India including the stock market, seemed to roar. The NSE index nifty has given an astonishing return of over 42% since coming of PM Modi in the central government.
Although the stock market has welcomed our PM with a bullish trend, however, it didn’t seem to motivate the participation of common people in the market as much as anticipated.
If we compare the participation of the common people in the stock market around the world, we can find that India’s participation percentage is even below the average. In China, around 10% population of the common people participates in the stock market. Further, in the USA, this percentage is as high as 18%.
Nevertheless, what really worries about the participation of the Indian investors in the market is its minimal growth. The percentage of investors participating in the market currently, is the same as 2 decades earlier (in the 1990s). The governing bodies have not been able to attract more retail investors to invest in equity market.
Even in 2017, stock market investing is considered as the rich guy’s games. Most of the retailers who invest in stocks are bankers, businessmen, engineers, lawyers etc, whose average monthly income are in six figures.
1. Lack of awareness:
Many of the people are unaware of stock investing. They do not know how much returns they can get by investing in the stock market.
A common villager doesn’t know how to earn from stocks and doesn’t understand the power of compounding.
A local retail shop owner does not know what is a demat and trading account.
An old small town electrician hasn’t ever met an investor or trader in his entire life.
This is all because of lack of awareness. In short, unawareness is one of the biggest reasons why most Indians do not invest in stocks.
2. Common Investing myths in India:
Since childhood, everyone hears about how his uncle/cousin/ neighbour etc who has lost his entire fortune in the stock market. Stock market investing is considered as gambling in India.
Many people do not invest in the market because they follow the famous investing myths prevailing in society.
Few of the famous stock market myths which stops a common person from investing in stocks are:
  • Investors who invest on their own are intelligently gifted.
  • Paying a profession is better than making your own investing decisions
  • Investing on your own is very risky etc.
These myths are the biggest barrier to common people and the stock market and a reason why most Indians do not invest in stocks.
3. Not willing to take the risk:
The risk is always involved in the stock market no matter how many studies you have done and how fundamentally strong the company is. Most of the conservative Indians are not willing to take a risk on their hard earned money and considers 4% return from the savings account as safe. They will only invest if they are assured that their investment is 100% risk-free, which stock market never is. The risks involved in the market stops these people from investing in stocks.
However, one always has to take some risks in order to get some reward. Remember- ‘No Risk, no reward’. Further, there is a famous quote by Warren Buffett that I would like to quote here:
‘Stock market investing is about minimising risks, not avoiding it.’
3. No proper courses:
We don’t have a basic financial education in our schools.
Even many MBA, BBA, or BCOM degrees don’t have proper courses on investing/trading.
There are very few dedicated courses on the stock market. Although NSE and BSE provide few certificate courses, that’s not even close to fulfilling the requirements of the interested aspirants.
4. Lack of capital:
In 2012, the Indian government stated that 22% of Indian population is below its official poverty limit. The latest poverty line is targeted at Rs 32 in villages, Rs 47 in cities.
When a majority of the population are struggling to meet even the basic needs of life, there it’s logical that the percentage of people with surplus cash to invest will be low. Lack of capital is a major reason why most Indians do not invest in stocks.
5. Preference for physical assets like land, gold etc:
People still have a love for gold, lands, FDs etc. Many people consider investing in Real Estate, gold etc easier in India compared to paper assets, as this has been traditionally followed.
Investing in a land in your village, or buying gold jewellery form your local jeweller shop seems simple compared to opening a trading account which will further require the access to internet, computers etc. The natural tendency of Indians towards physicals assets is a big rationale for poor participation in the stock market.

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