In a series of tweets on Monday, Zerodha's co-founder Nithin Kamath cautioned retail investors against buying stocks using any 'buy now, pay later' (BNPL) type financial product.
Pushing for fiscal prudence, the young entrepreneur highlighted the risk of margin funding, the practice of using stocks as security for a loan. He credited the Securities Exchange Board of India (Sebi) and new-age online brokers for not launching schemes that encourage the margin trading facility.
"Unlike the previous bull runs, there isn't a lot of leverage in the system this time. Stocks are mostly bought with full money upfront. So when there are drawdowns in the market on days like today, retail investors aren't forced to liquidate, which also increases volatility," said Kamath in a tweet.
He added, "Credit goes to SEBI & also all of us new-age online brokers who haven't pushed customers to borrow and buy while placing orders. If platforms enabled greed by nudging users to borrow to buy more quantities, customers would ignore the risks of margin funding (Margin Trading Facility)."
Unlike the previous bull runs, there isn't a lot of leverage in the system this time. Stocks are mostly bought with full money upfront. So when there are drawdowns in the market on days like today, retail investors aren't forced to liquidate, which also increases volatility. 1/4
— Nithin Kamath (@Nithin0dha) November 22, 2021
He hoped that the broking business doesn't follow the lending business trend to attract new customers. "Buying stocks by borrowing at ~15% & risk of being liquidated in drawdowns, is probably the worst financial product for retail investors. Hoping that the broking industry like others doesn't morph into a lending business to recover the very high cost of acquiring a customer," said Kamath.
Incidentally, Kamath posted the tweets on the day when equity benchmark Sensex plummeted 1,170 points due to losses in Reliance Industries, Bajaj Finance and Kotak Bank. On Monday (November 22), the BSE index ended 1,170.12 points (or 1.96 percent) lower at 58,465.89. Meanwhile, the NSE Nifty also fell 348.25 points (or 1.96 percent) to 17,416.55.
According to IIFL Wealth and Hurun India’s 40 and Under Self-Made Rich List 2020, Zerodha's co-founders Nithin Kamath and Nikhil Kamath are the richest self-made billionaires in India under the age of 40, with a wealth of around Rs 24,000 crore.
