In a series of tweets on Monday, Zerodha co-founder Nithin Kamath cautioned retail investors against buying stocks using any “buy now, pay later” (BNPL) financial product.
Pushing for fiscal prudence, the young entrepreneur highlighted the risk of margin financing, the practice of using shares as collateral for a loan. He credited the Securities Exchange Board of India (Sebi) and new age online brokers for failing to launch programs promoting ease of margin trading.
“Unlike previous bull runs, there isn’t a lot of leverage in the system this time around. Stocks are mostly bought with all of the money up front. So when there are Dips in the market days like today, retail investors don’t have to liquidate, which also increases volatility, ”Kamath said in a tweet.
He added, “Credit goes to SEBI and all of us, the new generation online brokers who haven’t pushed customers to borrow and buy while placing orders. If platforms allowed greed by causing users to borrow to buy more quantities, customers would ignore the risk of Margin Trading Facility. “
Unlike previous bull runs, there isn’t a lot of leverage in the system this time around. Stocks are mostly bought with full cash up front. So when there are declines in the market on days like today, retail investors don’t have to liquidate, which also increases volatility. 1/4
– Nithin Kamath (@ Nithin0dha) 22 November 2021
Nithin also shared his concern, saying that if one broker starts offering the BNPL option, the other should follow. “But given the high client acquisition costs for many brokers, what worries me is that if someone launches some type of product buy now pay later to invest, it will eventually push everyone to start. Using it as a hook to generate income won’t be fair to customers, ”Nithin’s tweet read.
He hoped that the brokerage industry would not follow the trend of the lending industry to attract new clients. “Buying stocks with about 15% borrowing and risking being liquidated by lot is probably the worst financial product for retail investors. Hoping that the brokerage industry like any other doesn’t turn into a lending business to recoup the very high cost of acquiring a client, ”Kamath said.
Incidentally, Kamath posted the tweets on the day the Sensex stock benchmark fell 1,170 points due to losses from Reliance Industries, Bajaj Finance and Kotak Bank. On Monday, November 22, the BSE index ended down 1,170.12 points (or 1.96%) to 58,465.89. Meanwhile, the NSE Nifty also lost 348.25 points (or 1.96%) to 17,416.55.
According to IIFL Wealth and Hurun India’s 40 and Under Self-Made Rich List 2020, Zerodha co-founders Nithin Kamath and Nikhil Kamath are the richest Indian billionaires under 40, with a fortune of around Rs 24,000 crore. .