A late-in-life tryst with the markets

After close to four decades of penny-pinching and living on shoestring budgets, I stepped into an era of relative financial comfort about 20 years ago, following my retirement from service. For the first time, I began to experience a new relationship with money. The days of borrowing from banks or against insurance policies had receded into the past.

Thanks to the munificence of successive Pay Commissions constituted by the Government of India, along with a couple of windfalls in the form of retirement gratuity and bonus shares allotted by companies, I found myself reasonably well provided for. Added to this were generous sitting fees for attending board meetings of a carefully chosen public sector company, and handsome honoraria from institutions where I mentored civil service aspirants.

I was also persuaded by a businessman friend to accept the chairmanship of one of his companies, which was engaged in a novel environmental pilot project in the power sector. It was the only such assignment I accepted post-retirement, largely because the friend was an honest and committed industrialist who assured me that he would never expect me to open doors in the corridors of power.

It was thus that I found myself with modest surplus funds that could be invested for reasonable returns. The corpus was not large enough to venture into avenues such as gold or silver. Investing in company shares, therefore, seemed a sensible alternative.What began as a cautious effort to make the best of what I had gradually evolved into an engaging exercise. Buying and selling shares became something of an intellectual game, involving an understanding of market language, terms such as bullish and bearish trends. Although I had served as a bank officer decades earlier, it was only then that I began to truly appreciate the meaning and value of money, and the nature of trading in financial instruments.

Since the days when the barter system prevailed among ancient communities, the evolution of money has led to a chain of economic and financial developments. One of the most significant among them has been the emergence of corporate entities raising capital from individuals and the public to invest in remunerative activities, such as the production of goods and provision of services.

Shares or securities came to be offered for purchase, enabling companies to raise funds for expansion, innovation, and job creation. A shareholder, in turn, owns a small part of the company and is entitled to a share of its profits.

In the case of limited liability companies, the shareholder’s liability is restricted to the value of the shares held. This concept played a crucial role in the growth of the corporate sector and the development of stock markets.

Initially, trading in shares served the purpose of spreading risk across a large number of investors. Over time, stock markets have evolved from face-to-face trading to sophisticated electronic platforms, enabling greater liquidity and global participation.

Stock exchanges are regulated platforms where buying and selling of shares take place. Today, transactions are conducted through trading and demat (dematerialised) accounts, with prices fluctuating based on company performance, earnings forecasts, and broader market sentiment.

The Indian stock market has a fascinating history. From informal trading under banyan trees in Mumbai, it has grown into one of the world’s most dynamic financial ecosystems. The Bombay Stock Exchange, established in 1875 as the Native Share & Stock Brokers’ Association, was Asia’s first stock exchange. The National Stock Exchange, which revolutionised electronic trading in India, came into being in 1992.

The London Stock Exchange, founded in 1801 and one of the world’s oldest continuously operating stock exchanges, is located in Patermoster Square, near the St Paul’s Cathedral. The New York Stock Exchange, the hub of global finance, the largest in the world by market capitalisation and operating since 1792, is located in Wall Street. Globally, institutions such as the London Stock Exchange and the New York Stock Exchange have played pivotal roles in shaping modern finance.

Stock markets are vital for a country because they drive economic growth by allowing companies to raise capital for expansion. They act as financial barometers indicating economic health, boost the GDP by mobilizing public savings into productive investments, and provide liquidity for investors to easily trade securities. They also have a significant role to play in gauging the performance and economy. For instance, market trends such as the Sensex, indicate the overall health of the economy.

Their allure has also made them a popular theme in cinema. Films such as The Wolf of Wall Street and The Big Bull have dramatised the world of high finance, the latter drawing inspiration from the life of stock market operator Harshad Mehta.

A more complex dimension of financial markets is represented by derivatives, financial instruments whose value is derived from underlying assets such as stocks, bonds, commodities, or currencies. These include futures, options, forwards, and swaps, and are used for hedging, speculation, or leveraging exposure. However, derivatives also played a central role in the 2008 global financial crisis. Instruments such as credit default swaps and mortgage-backed securities amplified risks and interconnected financial institutions in ways that proved catastrophic.

The collapse of institutions like Lehman Brothers and Bear Stearns underscored the dangers of excessive leverage and poor risk management.

While the Federal Reserve System grappled with the fallout, India’s Reserve Bank of India, under Governor Y. V. Reddy, adopted a calibrated approach that strengthened the country’s external sector and built substantial foreign exchange reserves. This helped cushion India from the worst effects of the crisis.

In the years that followed, India emerged as one of the largest markets for futures and options trading in terms of volumes. This growth has been driven by increasing retail participation and user-friendly digital platforms such as Zerodha and Groww.

At the same time, concerns have arisen regarding the scale of losses incurred by retail investors, prompting regulators like the Securities and Exchange Board of India and the RBI to step in with safeguards.

As the global economy recovered, India stood out for its resilience. Despite the unprecedented downturn, it remained among the fastest-growing major economies, with GDP growth consistently exceeding 6% during that period.

Thanks to some expert advice which I sought, and received, from knowledgeable people, including my son-in-law, I managed to invest wisely in a few blue chip shares, as a step which served the purpose of justifying my (mis) adventure!

(The writer was formerly Chief Secretary, Government of Andhra Pradesh)