The Small Investor Is Being Sold a Fantasy

Ten years ago, picking stocks was a very advanced art, and needed patience, paperwork and a broker who used a lot of words that were very foreign to the common man.

Today, an 18 year old can open a demat account from his smartphone, transfer ₹500 and buy a stock in seconds and watch the stock price move before breakfast. That's what it sounds like.That's the definition of democratisation. There was also the advantage that the market has opened up and many have found other means of earning income, and the development of companies by allowing people to invest in shares.

This has reduced many of the impediments between the financial markets and thegeneral public in India. The problem is some of the friction worked in our favor, it made investors pause, think and know what they were doing. Today the same technology that made it possible for millions to build wealth has become a growing way for people to invest, more akin to a hail mary pass they hope will get them the massive profits they were shown. Where it may make money, and it's where it makes the money and makes the headlines, the common thread is the easy elision of any possible truth and in most of those instances, the inexperienced trader bets based on some imagined fantasy, and fails to make any money, or, in most of those cases, they lose their hard-earned money. Not only is the small investor handed access to the market, he or she is sold a dream of what the market can offer.

The story goes that anyone can get rich if they start trading early enough, trade smart enough and get in on the right stock before anyone else. It is a hugely appealing story and it is essentially an unfinished story. Imagine what it's like when someone logs in to an investment app, there is a real-time moving chart, green numbers show increases, red numbers show decreases. Notifications alert to price changes; stocks are displayed with percentages, and lists and rankings of “top gainers.” The experience is more like a consumer app than the stereotypical idea of investing being something slow and considered.

This is simply due to the fact that people are more likely to do something if it is easier.

Buying a share used to be an event, now it can be an impetuous act. That's important because investing and trading are not the same thing.

Investing asks: "What is this business worth and will it create value over the years?

Trading asks: What is this asset going to do next?

The smartphone is not discriminatory about the type of question you're asking, the interface is optimized to make a transaction happen. The solution does not lie in making investing easy again, nor does it lie in infantilizing investors by not allowing them to take risks, by the regulators or platforms. Rather, India should look at other types of friction, buyers of a complicated derivative should be made to face the reality of losing their money.

Users should verify if a particular person has been consistently accurate in their predictions and then make logical decisions based on verified information from those who have influenced them and on their own independent research. An investor might have the chance to view how he or she is performing compared to a simple, diversified index after costs before making frequent trades. Before the investor celebrates making a profit of ₹10 000, he might want to know if he has risked a lot to make this profit.

Good investing involves repetition, diversification and is very dull! The financial system has been trying to smooth out friction over the years, which lowers the number of transactions. In finance, though, some friction helps to keep people from themselves.

Investing is most often repetitive, diverse and very boring, the financial system has been working to minimise friction for a number of years as it is a bad thing for transactions.

This is an unprecedented time in India, and it has a young population that is active in the financial field. With the use of digital infrastructure, participation is now low cost, and domestic capital markets are being deepened. When the question of investment in equity shares, mutual funds and long term wealth creation is beginning to come up, it is for the millions of households.

However, the next step of fintech cannot be just about speeding up transactions, if India is to develop investors instead of gamblers, It should be about making comprehension quick, which would involve fostering platforms that enable prospective investors to get a sense of the market prior to entering. It's not about building an app to make the 19-year-old feel like Warren Buffett. It should focus on creating an app that would enable the said nineteen-year-old to better understand how Warren Buffett has found so much joy in doing nothing.

The little investor doesn't need to hear anymore about this, that wealth is one trade away, but he or she needs to know something more important and less exciting: Wealth is more likely to be produced by sticking around long enough to allow compounding to do its work. Democratization of access to markets is already in place in India, the next step is to democratize financial judgment and information.