​​​Common investors in Indian stock markets face multiple challenges and headwinds.

​​​1) Insider trading:

Indian stock markets are ravaged by rampant insider trading. Insider trading is buying or selling shares of a publicly traded company by someone who has non-public, price-sensitive and material information about that stock. An individual who has access to insider information would have an unfair edge over other investors, who do not have the same information, and could potentially make large profits at the cost of other investors. Insiders could be promoters, directors, auditors, senior executives etc. who have access to company’s information, before it is disseminated to stock exchanges. Insider trading includes tipping others when you have any sort of non-public information. 

2) Price rigging:

A serious menace to common investors in India is the price manipulation by operators, promoters or bull and bear cartels. Speculative trading by professional bulls and bears has degenerated into manipulative practices through informal countrywide syndicates. Operators, with access to insider information, also indulge in front running or price rigging. Prices of shares are also artificially increased by circular trading by promoters, before a Rights issue or a QIP issue. Gullible common investors who buy such shares find the prices of those shares dropping greatly afterwards and lose their money.

3) Blindly following the crowd:

Ordinary or common investors generally lack the conviction or courage to take decisions based on their own wisdom or judgment. As a result, they exhibit herd mentality or follow the crowd. Such herd mentality leads to mediocre returns or losses for common investors.

4) Inadequate information about the quoted companies:

There is lack of adequate information about the quoted companies, particularly for small and mid-cap companies. Many ordinary investors do not know the reasons why the stock price is going up or going down particularly of small and mid-cap companies, due to lack of sufficient and timely information in public domain. This prevents them from making timely investment decisions.

5) Unpredictable moves of FII’s:

Indian stock markets often dance to the tunes and liquidity flows of Foreign Institutional Investors (FII’s). Fund inflows or outflows into or from Indian stock markets by FII’s are quite unpredictable and depend on their global strategies. As a result of such unpredictable and fast paced moves by FII’s, common investors are at a receiving end.

6) Global effects:

In the present globalized world, Indian stock markets are integrated with world markets. Any moves in the markets of other major countries affect Indian stock markets also, though such global reasons do not directly affect the financials of our companies or economy. Ordinary investors lack the skills, time and resources to effectively assess or monitor various global developments. As a result, they are unable to take preemptive investment decisions.

7) Corporate Governance issues:

The major problem, currently being faced by retail investors in small and mid-cap companies, is poor Corporate Governance standards. Promoters in these small and mid-cap companies indulge in dubious practices like fund diversion, shady related party transactions and fudging of accounts etc. By the time, common investors sense such Corporate Governance issues, the share prices already crash, leaving them high and dry.

8) Co-location servers and Algo Trading:

Many brokers have their co-location servers installed in the stock exchange premises, to get price and order- book information ahead of the rest of the market participants. Such privileged co-location brokers also employ Algorithmic Trading software programmes to place their propriety trades, to take advantage of the order- book information that they get ahead of the rest of the market participants. As a result, common investors do not have a level playing field in trading and end up losing money.