Last week, in response to a parliamentary question, the finance ministry released some information about the trading patterns on India’s stock exchanges. There were a handful of data in the statement but the one that grabbed the headlines was the fact that a vast proportion of the trading volume on stock exchanges comes from a few investors. Half the cash segment trading were done by 451 investors and half of the derivative options trading came from 106 investors.
At first glance, this appears to be a fair amount of concentration of stock market activities in an unexpectedly small number of investors. However, I don’t agree with this view. I think this amount of concentration should be considered expected and normal. Not just that, it is not even a very significant statistic and doesn’t tell us anything useful about stock ownership or about participation in the stock markets. And it tells us absolutely nothing about who’s making money out of stocks.
I will illustrate my point with a real world example. I have a friend who is the archetypal ‘high-net worth individual’. He has a flourishing trading business and is also an active day trader on the stock markets. The last time he told me some details about his trading activities (which was a few months ago), he had about Rs 5 crore deployed in the markets. He also told me that he ended up ‘rotating’ (his word) this entire sum at least once over two-three days. Even allowing for some inaccuracy, this implies an annual trading of some Rs 300-400 crore from an investor with 0.25 per cent of that amount actually deployed in the stock markets. At the other end of the spectrum, there are equity mutual funds with Rs 2,000 crore and above that have annual trading turnover of less than a tenth of that. However, the ‘moral’ of my story is that my friend has never made any significant amount of money out of stocks. For all practical purposes, it’s just an expensive channel of entertainment that appears to have a goal.
I am not saying that this sort of an investor dominates the top half of above mentioned statistic. For all I know, there could be enough high-speed automated trading in India to have rendered the traditional day-trader’s volumes irrelevant. All I am saying is that many people seem to be over-interpreting statistic on trading. They actually tell us close to nothing about who owns stocks and who makes money out of them.
This article was originally published on August 25, 2010.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
