There has been an explosion in opening demat accounts since the beginning of 2020. As of December 2019, the total number of demat accounts was 39.4 million. It is worth noting here that this was the number of demat accounts opened and active since the mid-1990s when demat accounts first became the order of the day.
From the end of 2019 to August 2022, a whopping 61.1 million new demat accounts have been opened. So, more demat accounts have been opened in the last 32 months than in the two decades preceding it.
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The question is why. As a result of there being many low-cost brokerage firms, the process of opening a demat account has become very easy. It can now be done from within the comforts of one’s home through a mobile phone. Earlier, one had to visit a bank or a brokerage to open one.
This became obvious to many people only when they were stuck at home during the pandemic, leading to a surge in new demat accounts.
The low-interest rate environment that prevailed after the spread of covid also pushed people towards opening demat accounts in search of a higher return on their savings.
Also, as the stock market rallied after the crash of March 2020, the number of demat accounts went up. Around 3.5 million new demat accounts were opened in October 2021, when the stock market peaked. The number has since fallen and stood at 2.2 million in August.
The question now is what proportion of the more than 100 million accounts in existence are seriously buying and selling stocks. Remember that an individual can open a demat account with more than one stock brokerage. Hence, the more than 100 million accounts in existence aren’t unique. Industry estimates suggest that around three-fifths of this tally is unique, meaning around 60 million individuals have opened more than 100 million demat accounts. This means around 4.3% of the population of around 1.4 billion has a demat account.
Further, data from RBI’s latest Financial Stability Report published at the end of June suggests that around 13 million retail investors traded in stocks in May. Clearly, only a small proportion of investors use their demat accounts regularly, which isn’t good news for the brokerages.
Against this backdrop, one could argue that investors are in it for the long-term and, hence, aren’t trading their portfolios much. But that will be an incorrect argument to make. As Nithin Kamath, founder and CEO of Zerodha, India’s biggest stock brokerage, tweeted in May, the number of active demat accounts with holdings of more than ₹10,000 stood at less than 30 million. This was when the total number of demat accounts was 92.1 million. The situation may not have changed much.
This is hardly surprising given the income levels in the country. As the State of Inequality Report released in May pointed out: “A monthly salary of ₹25,000 is already among the top 10% of total incomes earned." It means anyone earning ₹3 lakh or more in a year is among the top 10% of income earners, or anyone earning less than ₹3 lakh a year is among the bottom 90% of income earners.
The moot point is most Indians don’t earn much to invest in stocks. Given this, while a lot of retail money has come into stocks since the beginning of 2020, for this to continue sustainably over decades, the average Indian needs to earn more. That’s the long and the short of it.
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