The Indian capital market is a collection of contradictions. Surprisingly, all of them add to the strength and colour of the stock market. Despite being there for more than a hundred years, the India stock market can still be considered a 20-year-old young boy.

Why 20? Because it was only as many years back — in 1992 — that the Harshad Mehta scam came to light and stocks become a matter of discussion in places where people did not even know there was something called equity or shares. Before 1992, there were only a handful of Indians who used to own stocks. Most investors used to apply for IPOs of companies and keep them for years in their portfolios. From the time when IPOs had hardly seen any major interest, a sudden change dawned after 1992.

IPOs that came in between 1992 and 1996 saw a big rush of investors, and there was a time when more than 20 IPOs would hit the market in a single week. That way, we are still a young capital market, and like a young kid who has just started to learn and grow, the Indian market too has seen its share of troubles.

Fortunately, the systems that have come in over the past couple of years and technological advancement have helped the Indian market come up as one the strongest markets on various parameters compared with many other emerging markets which saw crises and system failures, and were unable to contain the risk arising out of the global financial crisis.

In a country of more than 120 crore people, there are only 2 crore demat accounts as on date, which means less than 2 per cent of the population is exposed to the equity market. If one were to exclude investors who have multiple demat accounts and the ones who have opened demat accounts only to apply for an over-hyped IPO and are not using them for any other purpose, the number of active investors would be far less.

There are multiple reasons why many Indians are still unable to associate themselves with equity as an asset class and why not many want to get associated with it. We Indians are fine with gold and property, even though equity gives better returns over the long term. Till 2002, the level of scepticism was extremely high in the minds of investors, as whenever the market had gone up sharply, it was followed by a scam and a number of investors ended up losing their shirts in the process.

The worst was the 2001 scam, when technology and other stocks lost more than 95 per cent value in a matter of months. The fact that a number of these stocks were quoting at very high valuations without strong fundamentals ensured that they never recovered even though investors held them for a long time. It was only after 2004 that the indices made a new high. Thankfully no scam came to the fore since then and that helped increase the confidence level in the market.

The continued flow of foreign institutional money during 2004-2007 made investors more confident and made them realise that equity is also an asset class just like real estate and gold and it can give good return. Though the market crash of 2008 affected every investor very badly, but since the origin of the crisis was not in India, investor faith in the market and its long-term ability was not affected to the extent it had happened in the past.

The recovery in 2009 and till late 2010 once again bought back hope for domestic retail investors. The problem with Indian investors lay in the fact that majority of them were short-term traders and they always wanted to make a quick buck. There is nothing wrong in having such aspirations, but trouble begins when they do not realise that returns and risk go hand in hand. Indian investors are extremely poor at risk management. They end up taking more risk than they can afford to, and in the process they get thrown out of the market when capital gets eroded.

The root cause of this problem with poor risk management lies in the fact that a large number of people in the market fail to identify whether they are traders or investors. There is a world of difference between an investor and a trader. Most of them call themselves investors, but act like traders. To make matters worse, they don’t even follow what a trader is supposed to do.

A good trader takes both long positions and short positions in the market. But even when the market is overheated, it would be very difficult to find out people who would go for short selling. A handful of them who do, do so when the market has already lost significant value from its high. In the process, they often end up on the wrong side of the market.

And when the market is close to its peak and every newspaper is filled with bullish commentaries, there will be a large number of traders who would overexpose themselves on the bullish side and end up losing their shirts.

An investor is one who invests in stocks and then waits for a certain period for his wealth to grow along with the growth of the company. Look at the data of deliverable positions in various stocks. More than 90 per cent of trade volumes do not end up in stock deliveries. That indicates that everyone on the Street is keen to buy a stock and sell it within a day, forget about holding it for a long time.

The essence of the troubles for Indian investors and traders lies in the fact that they become fearful when it is a time to be hopeful, and they become greedy when it is time be fearful. The exact parallel of it would be spelling the word ‘buy’ as ‘bye’.

(The writer is director of independent brokerage Elan Equity Services and consulting editor of

Financial Chronicle)

rajivnagpal@mydigitalfc.com