Stock brokers are witnessing a substantial jump in trading activities as well as interest in opening new accounts ever since the nationwide lockdown. With positive growth indicators, affirmative news on Covid-19 vaccines as well as growing awareness towards financial independence through stock market investments, stock broking franchise is an indispensable business opportunity for serious business-seekers
Equity markets have emerged as an unlikely beneficiary of the pandemic as it has made a remarkable comeback after the gloom of the Covid-19 lockdown, aided by liquidity and lower interest rates. In fact, the Indian stock markets are hitting record highs amid rising optimism that Covid-19 vaccines and stimulus measures can turbo-charge economic recovery.
With the pandemic-induced lockdown and the resultant work-from-home (WFH) offering plenty of time, many people have found a way to not just invest their time but also reap some dividends.
From full-service brokers to new-age discount broking start-ups, stockbrokers are witnessing a substantial jump in trading activities as well as interest in opening new accounts ever since the first phase of the nationwide lockdown.
The surge in trading activity is on account of two broad reasons. First, a lot of people missed out on the post-demonetization market rally, when the markets went up from the 8,000-level to touch 12,400 points. So now, they didn’t want to miss out on investing during the Covid-19 fall.
Second, now there are no more incentives to keep money in FDs or savings accounts since interest rates on deposits have gone down substantially. Hence, retail traders saw the lockdown as an opportunity to grab good returns on investment.
In fact, despite being volatile the stock markets have grown quite aggressively ever since the pandemic broke out. The Nifty index, for instance, went down to about 7,500 points in April before touching 10,000 in June. It has crossed the all-time-high of over 13800 points in December.
Stockbrokers like Sharekhan, one of India’s leading players in the full-service broking space, saw their average daily trades go up by 28 percent as compared to the pre-Covid levels in January and February 2020. In addition, Religare Broking’s monthly new account openings have gone up by as high as 80 percent, particularly after the lockdown. Stockbrokers also saw a lot of interest from investors who had stopped trading in the last five to seven years.
High Retail Trader Interest
Major equity markets across the globe, including in India, have seen a rally since the crash in March. This seems to have attracted a lot of new investors to the market. To take advantage of the stock market crash in March followed by a gradual recovery, later on, thousands of retail investors have embraced equities for the first time during the Covid-19 pandemic in India. While some Robinhood investors turned to equities due to falling interest rates, others found ample free time to explore new investment territories from the comfort of their home during the lockdown.
Consider this – A million new dematerialized (Demat) accounts were opened for a third straight month in August, taking the total retail accounts tally to 44.46 million. Since the start of the year, close to 6 million Demat accounts have opened, a record for any calendar year, say industry experts.
The surge in new account openings has been underpinned by the rally in stocks. From the Covid-19-induced lockdown lows in March, the benchmark indices have jumped more than 80 percent. Moreover, several individual stocks have more than doubled luring many investors towards direct investing.
Discount Broking Leads the Way
Led by players like Zerodha and 5Paisa, discount broking has been gaining ground in India. Discount brokerage firms, the ones that charge flat commissions even on high-value trades, have remarkably strengthened their market share. As per industry estimates, the market share of the top five discount brokers is now about 18-20 percent in the overall equity and commodity markets broking commission pool. The top five discount brokers include Zerodha, Upstox, Angel Broking, 5Paisa, and Samco Securities.
As per industry experts, it is mainly the investors between the ages of 25 to 35, who are inclined towards discount brokerage platforms due to technology. In addition, the Millenials are attracted toward discount brokers as they do not charge any brokerage on cash market buying and selling. Their flat discount ranges from Rs 20-50 even on high-value derivative transactions.
The average age of these newbie investors has dropped to 30 and the average ticket size to about Rs 80,000.
As per market analysts, the rise in mobile trading is one of the key reasons for the jump in the market share of discount brokers. According to BSE's trading data, the percentage of trades on mobile since March this year has more than tripled in September. In April alone, there was a spike of more than 140 percent in mobile trades on the BSE. Mobile transactions now account for close to a quarter of the cash market deals on the National Stock Exchange (NSE).
Further, market regulator SEBI’s recent rule on upfront collection of margin in the cash market and high-value derivative margin that will be applicable from December are other key catalysts aiding the growth of discount brokers, analysts say.
Buoyed by the trend towards discount brokers, some full-service brokerages are innovating and creating models, where the fee structure is determined by profit at the client level. Sharekhan, now owned by French banking major BNP Paribas, in September announced its entry into the discount broking space with Espresso, which charges no fees if a trade ends in losses.
Moreover, discount brokers have made investing easier, faster, and transparent for the DIY (do-it-yourself) generation, removed hurdles with paperless onboarding, addressed cost concerns with a very low brokerage, and brought all types of investment options on a single platform.
As retail investors are high on investing in stock markets with high liquidity and booming markets, stockbrokers are pressing to increase their presence through franchise expansion. Discount broker firm 5Paisa.com, which has over 5000 franchisees doesn’t require any kind of investment and charges no franchise fee or royalty fee and can be run at home. On the other hand, full-service stockbrokers including Motilal Oswal Financial Service require an initial investment of Rs 5-10 lakh for a space of 300-1000 sq ft. The company charges a nil franchise fee and a royalty fee of 40 percent.
Firms like ICICIdirect and Edelweiss don’t charge any royalty fee and require an initial investment of Rs 2-5 lakh for roughly 200 sq ft of space. ICICIdirect demands Rs 25,000 of the security deposit from their franchise partners.
India has one of the lowest participation of retail investors whose number is around 4 crore only while the opportunity is pegged at 10 crores over the next few years. A surge in trading by individuals is likely to provide a fillip to the revenues of India’s stockbrokers, despite a bleak outlook for economic growth due to the pandemic-triggered disruption. Brokers may see as much as 12 percent growth in sales to about Rs 230 billion ($3.1 billion) in the 12 months through March 2021, according to a report by Indian rating company ICRA.
The option of work from home, coupled with limited investment opportunities given the challenging economic environment, and attractive valuations following the correction in March 2020 have helped drive investor interest to capital markets. With positive growth indicators, affirmative news on Covid-19 vaccines as well as growing awareness towards financial independence through stock market investments, retail investors’ interest in the capital market is likely to sustain over a long period of time. Hence, the stockbroking franchise is an indispensable business opportunity for serious business-seekers.