Bull In A Small India Shop

Jayesh Seth, MD, Kantilal Chaganlal Securities, says his volumes are upward of Rs 1 crore a day each from most of these new outlets. "Trading on the terminal brings transparency and the brand name of an established brokerage house gives trust; so retail investors now feel more secure in investing in the markets," he explains. Seth says he got over Rs 18 crore worth of subscriptions for the recently concluded Punjab National BankIPO from his Raipur, Chhattisgarh, branch.

The data relating to NSE trading volumes shows that since the mid-1990s, the share of big cities fell from 93 per cent to about 80 per cent in 2003-04. Which means that the share of the smaller towns has nearly trebled—from 7 per cent to 20 per cent. Contrast this with the fact that in big cities, the share of foreign institutional investors (FIIs) has gone up in the same period. While one reason for this trend can be attributed to growing FII inflows in the past two or three years, it's also indicative that retail interest in these cities may havewaned. Increasingly, the metro-based investor has been investing in the markets through mutual funds, rather than punt on hisown. After all, he burnt his hands, lost his shirt, and given up on stocks after a series of scams rocked the bourses in the 1990s.

And that's the clear downside that most small-town investors refuse to think about. In places like Tumsar and Tinsukhia, the high of following a rising stock often supercedes the need to know the details about the company or its management. In the end, all of them take risks that only the innocent can; sometimes their decisions yield profits, other times there's heartbreak. But as experience has shown time and again, whatever happens as long as the bull run lasts, most of them are likely to get hit the hardest when the big correction comes or when the bears overpower the bulls. They are the traditional lambs for the big slaughter.

It's an addiction. "Yeh to shama-parwane ke jaisa rishta hai (This is like the relationship between a moth and a flame)," says Manikchand Nyaykar, a grain merchant who comes to trade almost every day at Rane's office. He won't reveal whether he has made trading profits, except admitting that if he ever told his wife this secret equation, she would never let him into the house again.

When the morning tips arrive from Mumbai, there is a scramble to combine it with unrelated factors like the day's astrological forecast, the individual's latest run with luck and his history in a sector to arrive at a buy/sell decision. What about research reports, latest news, or sectoral trends? Gajke isn't even clear about the difference between a mid-cap and large-cap stock. According to him, "luck is the most important thing, study (of offer documents and other research reports about companies) is not so important".

Amar Nenwani, who was in the textiles business and is now retired, visits a more upscale brokerage in Nagpur daily. For the past few months, he has been starting his day at 7 am watching market updates on TV, and ending with the astrological forecast of the markets at midnight, with trading taking up most of his day. Using a part of his retirement savings, he admits to initial losses of nearly Rs 1 lakh, but has earned money, thanks to a new trading strategy. "The combination of sectoral understanding and astrology is helping me recover. Astrologically, January to May 2005 was not good for me. So, now the past few weeks have been better," explains Nenwani who invests in textiles and the banking sector and does delivery-based trading only. With interest rates for savings going down, retirees like Nenwani are tempted to try their fortunes on the markets, where returns can be higher and there's easy liquidity. The only problem: all of them forget about the risks.

Therefore, it's not surprising to learn that although Nenwani carefully records the success rate of each analyst who appears on TV channels, he has never read any offer or risk document. Even those who do read research reports and other documents admit that when one is sitting in front of a terminal, one tends to simply forget all that homework. When a stock is rising in front of your eyes, and joyous whoops from investors who had purchased the scrip fill the room, it's hard to stop oneself from buying the same stock.

"When the rally comes, it is hard to resist temptation," says Nagpur resident Rakesh Khanna, who had a transport business before he became a day trader eight months ago. He made an initial loss of Rs 30,000 as he would buy stocks across a broad sectoral spectrum at the peak of the bull rallies and incurred losses when the long-overdue corrections came. Now, he's slowly reducing them. Although a few brokers say they encourage people to buy safer instruments like mutual funds, they admit they are unsuccessful as the returns and thrills from these don't match those of everyday trading."Many want to make money, not invest," says Piyush Kulshreshtha, head (brand management), Motilal Oswal Securities.

Less than one per cent of Indians invest in stockmarkets. In the big cities, most individual investors are business channel junkies who spout unfathomable market jargon. However, in small-town India, the new retail investors are the least aware, least educated and, yet, take the biggest risks. They do it for the adventure, or because the avenues to invest elsewhere are shrinking and they see stocks as a one-way ticket to riches.

Unaware neo-risk-takers can also create financial trouble for the brokerages in smaller towns. Prashant Bisen runs a brokerage franchise in Gondhia and once did business of over Rs 1 crore a day with a substantial chunk of it coming from day trading volumes. Then some of his trader friends invested in volatile and expensive stocks like Infosys and McDowell and lost money in a market correction that happened early this year. Others purchased Shyam Telecom at Rs 100 per share but, because of lack of information, did not know of the company's merger with Shyam Manufacturing. Post-merger, the stock was quoted at Rs 85. Bisen had to force them to repay the losses. His friends, who had to sell property to repay, became sworn enemies. To be safe, Bisen now ensures that most trading is delivery-based, and not speculative. But that's not easy as dozens of his clients come to hang out and have fun with speculating in stocks; their work is tied to agriculture and they are free during off-seasons and feel they can just make an extra buck or so.

Obviously, some of them are smart and learn to stay away from the edge of risk and high returns. B.D. Mandurkar, a rustic and retired forest official, says he knows nothing about the markets. But once every few weeks, he comes from his far-flung village to make sure that things are okay with this portfolio, which comprises banking stocks. He plays safe and trades on delivery basis only. Mahesh Lalwani, who was once a long-time investor but stopped after the Ketan Mehta scam, is back. He now feels that the markets are much safer and more transparent. In this phase of investing, Lalwani also made initial losses in day trading. But he has learnt his lesson and does delivery-based trading, which has enabled him to recover his earlier losses.

Fortunately, many brokerages are trying to help investors by sharing research knowledge with them and increasing awareness about risks. C.J. George, who heads Geojit, a securities house, translates risk disclosure agreements in regional languages like Malayalam, Tamil and Kannada and reads them out to every investor in these small towns. Several sub-brokers and franchisees in small towns also translate research reports. Motilal Oswal Securities conducts regular investor education seminars. All their sub-brokers and franchisees are on conference call daily and videocast once a week. This is to ensure that they understand the markets better.

Is that enough? Will it help turn the fortunes of the retail investor? Some might be lucky like the large number of millionaires in Amalner in Maharashtra, who invested in their home company Wipro. But small investors are also the first to lose everything when the bull run runs out of steam. Influenced by hype, they usually enter the market at the wrong time—when it's nearing its peak. The inevitable correction comes, and they take a beating—and they don't have the sustenance to remain invested and wait for the next bullish phase. But it's just a matter of a few years. The markets rise again, hope melds with greed, and the moth is back to the flame.