When greed is good (or is it?)

Call it the retail paradox. Over the past four years, the benchmark 30-share index of the Bombay Stock Exchange (BSE), the Sensex, has spurted a little over five fold. In the past one year (till July 20, 2007), the Sensex has gained 55 per cent. Yet, less than 4 per cent of Indian household savings are invested in equities. Says Nilesh Shah, Managing Director & CEO, Envision Capital: "Ignoring equity is not the best decision.

A rising market, a growing economy, lower inflation and steady growth of Indian corporate sector augur well for the stock markets in the years to come."

Now consider the other irony: Even as the indices keep surging northwards, hitting new highs with unfailing regularity, the retail holding in Indian stocks is actually dropping. As of June 2007, the average retail holding in BSE 500-listed companies has dropped to 14 per cent, from 21 per cent on June 2004. Foreign institutional investors (FIIs), on the other hand, are the dominating force on Dalal Street, with an average holding of 13 per cent as of June. Explains Gagan Banga, Executive Director, Indiabulls Financial Services: "The drop in retail is due to profit-booking by existing players that wanted to cash out in the rally. It would be wrong to say retail investors aren't there in equities. They are coming in good numbers, but the value of their investments is small."

Brokerages for their part are doing their bit to spread the equity cult far and wide, right up to the tier III cities. Whilst the number of brokers registered with the Securities & Exchange Board of India (Sebi) has inched up marginally, it's the sheer spurt in the number of sub-brokers that's driving up-country retail participation. Consider the numbers: In 2005, the number of brokers and sub-brokers registered with Sebi stood at 9,129 and 13,684, respectively. By February 2007 the brokers had increased to 9,440. But the sub-brokers' band nearly doubled to 26,724 in that period.

Of late, brokers have gone on a binge of adding broking terminals. In the last few months, Angel Broking has increased the number of its terminals to 6,250 from 5,081; Indiabulls has over 6,000 terminals. Then there are players like Motilal Oswal Securities growing the inorganic way in a bid to enter new geographies. In 2006, the Mumbai brokerage acquired Peninsula Capital Market in the south, which at a stroke gave it a reach of 60 cities with 200 outlets. Says Indiabulls' Banga: "The objective of expanding is also to mitigate risk, as otherwise all of us would be fighting for a share of the same old pie." Adds Shah: "Since the long-term trend is bullish, it's not a bad idea to expand one's reach. After all, there is huge money available in tier II cities."

Meantime, it's getting easier for the small investor to access equities. Consider internet trading for instance, which is becoming increasingly popular with the youth employed in high-growth sectors like it services, business process outsourcing and retail. Small wonder that the average internet trading value in the cash segment has increased from Rs 1,200 crore in 2006 to Rs 1,730 crore in the current year.

Yet, in such euphoric times it's easy to forget that equities are by nature risky investments; any sharp correction-the higher the market goes, the faster it tends to fall-can result in retail investors, who are typically the last to bail out, losing their shirts. Shah agrees that investors should be present in equities, "but not with a blind eye. It's best to consult an investment advisor or a brokerage that's backed by solid research before taking the plunge."

Clearly, there's no denying the power of equity. Consider: If you had invested just Rs 10,000 in 1980-81 in the initial public offering (IPO) of Wipro that sum would be worth a cool Rs 250 crore today. That's why Shah says: "Today there are three options to create long-term wealth: One is real estate, the second is to become an entrepreneur. And the third is to invest in equities."