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Nithin Kamath, 39, Founder and CEO, Zerodha. Kamath, who already had experience in the business he was setting up, put as much as  ₹1.5 crore from his own savings to start the venture
Nithin Kamath, 39, Founder and CEO, Zerodha. Kamath, who already had experience in the business he was setting up, put as much as 1.5 crore from his own savings to start the venture

Nithin Kamath's take on Indian capital market size and why it's 'flawed'

  • Zerodha founder Nithin Kamath says looking at trading turnover to estimate capital market size is misleading. That's because most trades are leveraged
  • The best way to estimate the size of the Indian capital markets is by checking the revenue pool

Zerodha founder Nithin Kamath stated that often we make the mistake of estimating the size of the Indian market by looking at the trading turnover, saying that 'it's misleading'.

This is because, Kamath explains, 'most trades are leveraged and ideally, we should look at the margins being traded, not the trade value.' And once we start looking at it from that perspective, 'Turnover will be less than 10% of the trading turnover declared.'

Recently Kamath published an article on one of Zerodha's platforms, in which he writes, we have all heard of the lakhs of crores of Rupees worth of trading turnover that happens in the Indian capital markets every day, creating the illusion that the markets are massive.

Then sharing his personal experience, he further add, from the time we started Zerodha in 2010, I have always been asked, “what is your trading turnover?". The primary objective of this question is usually to estimate the size of our business. I was always forthright about this, until an incident that made us realise that talking about absolute turnover as a brokerage firm is misleading."

Indian Retail Investors

Speaking about India retail investors first, he says, "If you look at the above active retail participation numbers, the yearly active customers are just ~1% of India’s population. This if you would compare to developed markets, is ~ 20%."

People who can invest or trade in the markets need to have money to trade or invest. There were only 5.78 crore people who filed income tax returns last year. Out of that, 75% earned less than 5L/year. While there still exists a substantial parallel economy where income isn’t declared, it is difficult for such money to flow into capital markets, he adds.

He further says, "With this data in mind, if you looked at the target market size, it would seem like it has to be a subset of 5.78 crores. At 1.3 crores active investors, that is an almost ~20% penetration of the realistically addressable market and not ~1%."

Why the perspective of looking at the Indian Capital market size is flawed?

Explaining why looking at the capital market size from that perspective is flawed, many don’t realise that only a small portion of turnover comes from equity delivery trades and that the majority comes from intraday equity and F&O. While the majority of people around you are investors who buy and hold stocks, a small community of intraday and F&O traders contribute most of the turnover on the markets.

Again, extrapolating from our client base, we believe this community is not more than 10lks in size at any given time. Hence, "... profiting from active trading is extremely difficult."

"The main reason why the much smaller active community of traders can generate the majority of turnover is leverage. Leverage gives the ability to buy or sell for much more than the money in hand."

For example, he says, to buy 1L of Reliance equity delivery, you’d need 1L with you. But to trade 1L of Reliance intraday, you’d need only about 10,000 in your trading account, or need 10% margin, or trade with 10x leverage.

For most stocks, brokers offer intraday leverage of at least 5x. With leverage, the per trade value goes up exponentially.

So what is a better way to look at the capital markets in India?

The best way to estimate the size of the Indian capital markets is by checking the revenue pool, he said on Twitter.

Adding, this I think, is less than 50k crores across 1500+ brokers, exchanges, & depositories. FYI, revenues of Reliance was 6.5 lakh crore and Infy 94k crore.

Concluding the article he said, the markets will expand as the country’s economy grows and people move up income brackets.

The only real use of tracking trading turnover is determining the change in our capital markets’ trading activity.

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