etInternational Journal on Emerging Technologies 3(2): 67-79 (2012)

ISSN No. (Print) : 0975-8364ISSN No. (Online) : 2249-3255

Investor’s Attitude towards Secondary Market Equity Investmentsand Influence of Behavioral Finance

Dr. Rajeev Jain

Professor, LNCT (MBA), Bhopal, (MP)(Received 15 October, 2012 Accepted 08 November, 2012)

ABSTRACT: This research explores some of the unanswered important questions about stock marketsthat can be examined and investigated by an emerging field, behavioural finance. It also explains thefactors responsible for the unusual movements in the stock markets, which could not be fully explainedby the theories of traditional finance. This study shall examine three important attitudes displayed by theinvestors. They are: ‘Expectations’ those investors have about the future performance of the stockmarket in India; ‘Confidence’ that investors have regarding their investments; and ‘Herd Instincts’ soinvestors tend to herd together. Present study shall also analyze the Investors’ preference towardstraditional trading and online trading.

Keywords: Behavioural Finance, gross domestic product (GDP).

I. INTRODUCTION

The economic development of a nation is reflected bythe progress of the various economic units, broadlyclassified into corporate sector, government andhousehold sector. While performing their activities,these units are in a surplus /deficit/ balancedbudgetary situations. There are areas or people withsurplus funds or with a deficit. A financial system orfinancial sector functions as an intermediary andfacilitates the flow of funds from the areas of surplusto the areas of deficit [2].The financial system or the financial sector of anycountry consists of specialized and non-specializedfinancial institutions, of organized and unorganizedfinancial markets, of financial instruments andservices which facilitate transfer of funds. The word‘system’, in the term ‘financial system’, implies a setof complex and closely connected or interlinkedinstitutions, agents, practices, markets, transactions,claims, and liabilities in the economy. The financialsystem is concerned about money, credit and finance.Money refers to the current medium of exchange ormeans of payment. Credit or loan is a sum of moneyto be returned, normally with interest. Finance ismonetary resources comprising debt and ownershipfunds of the state, company or person [4].Economic growth implies a long-term rise in percapita national output. The basic conditionsdetermining the rate of growth are three- ‘Effort’,‘Capital’ and ‘Knowledge’. In the post Second WorldWar there has been an upsurge in the desire foreconomic growth following rapid political and otherdevelopments and increasing impatience in thecountries of Asia, Africa and South America withtheir existing economic conditions. The keen desire

for development has tended to minimize thesignificance of factors associated with ‘Efforts’.As regards ‘Knowledge’ it is suggested that therealready exists a vast amount of knowledge indeveloped countries. This reasoning has led toemphasis being placed on increasing capitalformation as the most crucial factor in economicgrowth of the underdeveloped countries.The rate of capital formation in the underdevelopedcountries has for a long time been hardly adequate toprovide even for a rate of growth of national output atpar with the rate of population growth. While thedeveloped countries have, with an average rate ofpopulation growth of 1.9 percent, been investing 15% to 18% (gross/net) of their national income, thegross/net rate of investment in underdevelopedcountries has been only 6% or 7% in the face ofpopulation growth at the rate of 2.9 % per annum [8].Financial institutions, also called financialintermediaries, provide means and mechanism oftransferring command over resources from those whohave an excess of income over expenditure to thosewho can make use of the same for adding to thevolume of productive capital. They, on the one hand,create claims in the form of their shares, debentures,deposits, etc., against themselves which they inducethe savers to accept in exchange for their savings(claims on society for goods and services in thefuture). On the other hand, they acquire claimsagainst the investors by investing in their shares anddebentures and by granting direct loans to them. It ishere that role of financial institutions can be traced.They provide a convenient and effective link betweensavings and investment. Financial institutions channelthe funds mobilized by them to those who requiremore funds than they have, such as business firms.

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Major problem facing a business firm is to approachthousands of small savers for raising desired amountof funds which means diversion from main businessactivity. On the other hand, those willing to save, sayRs. 25 a month, need a convenient outlet for theirsavings. Financial institutions provide just such anoutlet. These institutions, while themselves raisingresources from large number of small savers, makefunds available to industrial concerns in relativelybigger lots and thus reduce their burden andbotheration involved in raising resources directlyfrom individual savers. This is why financialinstitutions are regarded as ‘gap fillers’ [24].The economy of a country functions on thefundamental mechanism of savings and investment offinancial capital into economic activities that help inthe creation of economic wealth. Economic wealth inturn creates a conductive atmosphere for consumptionthat creates economic demand for goods and servicesthereby stimulating production and furtherinvestment. Therefore, this continuous economiccycle leads to growth in the economy which is usuallymeasured by the gross domestic product or GDP.The movement of capital in the economy from thesavings pool to the investment pool is performed by

two main platforms of institutional intervention- (a)the financial institution and banking framework and(b) the financial market framework. Banks andfinancial institutions on the one hand and the capitalmarket on the other continue to co-exist and performtheir respective functions as it is not possible for eachof them to completely substitute the other in takingcare of the needs of the economy. However,considering the fact that the capital market has awider role to play beyond merely being a catalyst forcapital creation, a developed and vibrant capitalmarket is the backbone of a healthy economy [25].As we know that capital markets play a vital role inIndian economy, the growth of capital markets will behelpful in raising the per-capita income of theindividuals, decrease the levels of un-employment,and thus reducing the number of people who liebelow the poverty line. With the increasing awarenessin the people they start investing in capital marketswith long-term orientations, which would providecapital inflows to the sectors requiring financialassistance. India has the third largest investor base inthe world. India has one of the world's lowesttransaction costs based on screen based transactions,paperless trading and a T+2 settlement cycle.

ECONOMIC DEVELOPEMENT

SAVINGS & INVESTMENT OR CAPITAL FORMATION

SURPLUS SPENDING DEFICIT SPENDINGECONOMIC UNITS ECONOMIC UNITS

INCOME MINUS INCOME MINUS

(CONSUMPTION+ OWN INVESTMENT)(CONSUMPTION+ INVESTMENT)

SURPLUS OR SAVING DEFICIT OR NEGATIVE SAVING

FINANCIAL SYSTEMFig. 1. Relationship between Financial System and Economic Development

Source: Bhole L.M., 2004, ‘Financial Institutions and Markets’

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II. INVESTMENT VERSUS SPECULATION

While it is difficult to draw the line of distinctionbetween investment and speculation, it is possible

to broadly distinguish the characteristics of aninvestor from those of a speculator as follows [5]:

Table 1. Distinguish between Investor and Speculator on the basis of Characteristics.

Characteristics Investor SpeculatorPlanning horizon An investor has a relatively longer

planning horizon. His holdingperiod is usually at least one year.

A speculator has a very shortplanning horizon. His holdingmay be a few days to a fewmonths.

Risk disposition An investor is normally not willingto assume more than moderate risk.Rarely does he knowingly assumehigh risk.

A speculator is ordinarily willingto assume high risk.

Return expectation An investor usually seeks a modestrate of return which iscommensurate with the limited riskassumed by him.

A speculator looks for a high rateof return in exchange for the highrisk borne by him.

Basis for decisions An investor attaches greatersignificance to fundamental factorsand attempts a careful evaluation ofthe prospects of the firm.

A speculator relies more onhearsay. Technical charts andmarket psychology.

Leverage Typically an investor uses his ownfunds and eschews borrowed funds.

A speculator normally resorts toborrowings, which can be verysubstantial, to supplement hispersonal resources.

Markets exist to facilitate the purchase and sale ofgoods and services. The financial market exists tofacilitate sale and purchase of financial instrumentsand comprises of two major markets, namely themoney market and the capital market. Thedistinction between capital market and moneymarket is that the former includes banks and otherinstitutions advancing loans for short and mediumperiods, and the latter comprises institutions whichgrant long-term loans in different forms and fordifferent purposes.Capital markets facilitate the buying and selling ofsecurities, such as shares and bonds or debentures. Inthe capital markets hundred of investors makeseveral deals a day. The screen-based trading makesthese deals known to all in the capital markets [19].It has two mutually supporting and indivisiblesegments: the primary market and the secondarymarket. In the primary market companies issue newsecurities to raise funds, Hence it is also referred tothe new issues markets. The secondary market dealswith the second-hand securities; viz, securities thathave already been issued by companies that arelisted in a stock exchange. Since the securities arelisted and traded in the stock exchange, thesecondary market is also called the stock market[13].Capital market is, thus, important for raising funds forcapital formation and investments and forms a veryvital link for economic development of any country.The capital market provides a means for issuers to

raise capital from investors (who have surplus moneyavailable from saving for investment). Thus, thesavings normally flow from household sector tobusiness or Government sector, which normally investmore than they save. A vibrant and efficient capitalmarket is the most important parameter for evaluatinghealth of any economy.It is being observed that huge fluctuations arehappening in Indian capital market in recent past,but with the help of proper mechanism, which isbeing observed in India and after examining variousrisk factors involved in capital markets, we attemptto say that the growth which has been observed inIndian capital market in recent past is a realty, butnot a myth.Till 1994, trading on the stock market in India wasbased on the open outcry system. With theestablishment of the National Stock Exchange in1994, India entered the era of screen-based trading.Online trading refers to trading through internet. Inthe Indian context, online trading can be rightlycalled as a recent phenomenon, and even till dayonline trading is not much popular among investorsfor which a list of factors can be blamed. This fact isclearer from the information available that wherenumber of stock exchanges in India has grown from7 exchanges in 1946 to total 23 stock exchanges till2005, only two stock exchanges are providing onlineshare trading. There is no denying the fact thatinternet trading offered investors convenience oftrading along with reduced cost.

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But Indian investors have not yet fully realized theimportance of using technology for stock trading.Over the past two years, the value of all tradesexecuted through internet on NSE has grown fromless than Rs.100 Cr. to over Rs. 700 Cr. in June 2005.Online trading is gaining momentum with tradingvolume growing by 150 % per annum [26].The movement of the Nifty 50, the most widely usedindicator of the market, is presented in chart 1. Theindex movement has been responding to changes inthe government’s economic policies, the increase inFII inflows, etc. However, the year 2006-07witnessed a favorable movement in the Nifty 50

Index, wherein it registered its all time high of4224.25 in February 07, 2007. The point-to-pointreturn of Nifty 50 was 12.31% for 2006-07.Comparing the movement of the Nifty, Sensex andNASDAQ over 2008-09 (all indices rebased for 1April 2008), as depicted in chart, it is seen thatNASDAQ performed better than the Indian indicesduring most part of the year. The returns on theNASDAQ were negative 33% during 2008-09, whilethat on Nifty 50 and BSE Sensex were negative 36%and 38% respectively, over the same period. About09-10, latest happening.

Chart 1. Movement of Nifty 50.Source: Indian Securities Market- A Review, NSE, Volume X, 2009

An investment is a sacrifice of current money orother resources for future benefits. Numerousavenues of investment are available today. Theyfall into two broad categories: financial assets andreal assets. The important financial assets areequity shares, corporate debentures, government

securities, bank deposits, mutual fund shares,insurance policies and derivative instruments. Realassets are represented by tangible assets likeresidential house, commercial property, agriculturalfarm, gold, precious stones, and art objects.

Table 2. Savings of Household Sector in Financial Assets (%).

Financial Assets 2004-05 2005-06 2006-07 2007-08P 2008-09 #Currency 8.5 8.7 10.2 11.4 12.5Fixed Income Investment 85.4 83.9 80.6 78.2 89.5Deposits 37.0 47.4 49.10 52.2 58.5Insurance/Provident &Pension funds

28.9 24.2 28.80 27.9 29.6

Small Savings 19.5 12.3 2.7 -1.9 1.4Securities market 6.0 7.2 6.9 10.1 -1.9Mutual Funds 0.4 3.6 5.20 7.7 -1.8Government Securities 4.9 2.4 0.3 -2.1 -4.5Other Securities 0.7 1.2 3.70 4.5 4.4Total 100 100 100 100 100

P-Provisional Figure, # Preliminary EstimateSource- RBI

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According to the RBI data, the household sectoraccounted for 84.8 % of gross domestic savings infixed income investment instruments during 2006-07;which has increased in comparison to 83.9% in 2005-06 (Table 1 & 2). In fiscal 2006-07, the householdsector has invested 55.7 % of financial savings in

deposits, 24.2 % in insurance/provident funds, 4.9 %in small savings, and 6.5 % in securities marketincluding government securities , units of mutualfunds and other securities (out of which theinvestment in Gilts has been 0.2 %) Thus, the fixedincome bearing instruments are the most preferredassets of the household sector.

Chart 2. Savings of Household Sector in Financial Assets.

III. INDIAN HOUSEHOLD INVESTORSSURVEY–2004The present study attempts to deepen ourunderstanding of the household investors’ problems,needs and concerns regarding investment in capitalmarket instruments in particular.The year 2001 was a particularly turbulent year forthe Indian stock market. It was marked by aspectacular market crisis in March 2001 due toblatant market manipulation by a big marketoperator, Ketan Parekh, a la Harshad Mehta. Soon tofollow was another blow to the market due to a majorcrisis in the UTI’s US-64 Unit Scheme.The year 2002 saw some reduction in the level ofvolatility and manipulation but considerable increasein the investors’ concern about corporate governance.Such increased concern was due to the windsblowing from the western countries, specially theU.S. The Enron and many other corporate scandals inthe U.S. had a worldwide echo which reached Indianshores also. The severity of corporate governancereforms adopted in the U.S. made Indian authoritiesalso to wake up.More recently in India, the concern about pricevolatility and manipulation rose suddenly due to thewild gyrations of the Indian share index on May 17,2004 (which came to be called ‘Black Monday’). Itwas caused by large-scale net selling by FIIs onaccount of the prevailing political uncertainty at thattime. Political stability was soon restored within afew weeks and the market sentiment went on

improving appreciably thereafter. Nevertheless, suchevents surely increase the stock market’s riskinessand to some extent dent the investors’ generalconfidence.An important point to be noted is that the winding upof US-64 scheme meant that a sizable chunk ofinvestors went out of the mutual fund industry. Thisscheme was the only mutual fund scheme held bymany households.Retail investors have been encountering seriousproblems with the demat system. This has happenedbecause the SEBI, in a hurry, made dematcompulsory without giving due consideration to therealities of our socio-economic situation. The result isthat India’s demat system has not evolved as avoluntary business service, priced attractively for themass of investors. It is heavily tilted in favour ofspeculators and large market participants but againstthe retail investors. Its effect has been to graduallypush out the retail investors from the equity market.The demat system was never promoted bycompulsion in the U.S. or U.K. It grew theregradually as investors became familiar with it andfound it beneficial and economical to them.The original objective of introducing the depositorysystem was to eliminate the many irritating problemsand costs (like back-and-forth transmission ofmillions of physical share certificates, bad deliveries,shares lost or stolen in transit, delay in share transferregistration, etc.).

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It has undoubtedly solved these problems but, at thesame time, the structure of demat charges has playedmischief due to being highly biased against smallinvestors. It has hurt them so much that they aretending to quit the equity market. This could nothave been the SEBI’s intention.The number of shareholders having a depositoryaccount at the end of December 2004 is only a littleover 70 lakh, whereas the total share owningindividuals in India, as per independent estimatesprovided by the Society for Capital Market Researchand Development and by SEBI-NCAER survey, isaround 2crore. A significant percentage ofrespondents stated that they are unable to understandthe demat system or that they find the procedure toocomplicated. Their problems deserve sympatheticconsideration by simplifying the procedures.The small investors are faced with a serious dilemma.On the one hand, if they demat the holding, they findthat long-term holding of shares in demat form isoften uneconomical due to annual accountmaintenance and custody charges. Both these chargeshave to be paid annually even when the return fromholdings is negative or negligible. On the other hand,if they continue to hold paper certificates, they willhave difficulty in selling their holding as and whenthey want because trading arrangements for papercertificates have been dismantled in haste withoutcreating an alternative reasonably economical tradingsystem. Hence, long term small investors aregradually quitting the equity market by becomingmostly sellers when market conditions becomebullish, as in 2003 and 2004.The over-all effect of the demat system has not beento attract a greater number of domestic retailinvestors into shareowners but the opposite. Thedemat system has been very attractive to thespeculators and frequent traders. For this and otherreasons, the speculative trading volumes have grownenormously but the percentage of annual households’financial saving flowing into direct shareholding andmutual fund schemes has fallen to a negligible level.What has fundamentally gone wrong with thedepository system is that it is designed to catermainly to frequent traders, speculators and largeinvestors rather than to provide an economicalpaperless system for long-term holding of securitiesby the huge number of small investors (Conducted BySociety for Capital Market Research &Development).

IV. INDIANS ARE WISE SAVERS BUT POORINVESTORSA recent nationwide survey of over 60,000households by National Council of Applied EconomicResearch (NCAER), New Delhi and Max New YorkLife has revealed that people in India do not plan forlong-term future and keep away from investing in

long-term instruments though they save for long-termgoals such as emergencies, education and old age.The book, 'How India Earns, Spends and Saves'launched by Deputy Chairman, PlanningCommission, Government of India, Montek SinghAhluwalia, Feb. 6, which contains the findings of thesurvey, reveals that this phenomena is not justconfined to just poor or middleclass households, butis prevalent in rich households too.The survey reveals that most Indians prefer keeping65 percent of their savings in liquid assets like bankor post office deposits and cash at home, whileinvesting 23 percent in physical investments like realestate and gold and only 12 percent in financialinstruments. For getting secure return on theirearning, 51 percent of Indians put their savings in thebanks while 36 percent of households still prefer tokeep cash at home. The investment in post officesand other guaranteed return schemes and plans getsminor part of total savings. Only 5 percent of familyput their money in post offices, while 2 percent buyinsurance policies and 0.5 percent invests in equities.Interestingly, though life insurance is among the mostpopular financial instruments (about 78 percent of thehouseholds are aware of life insurance), yet only 24percent of households have a life insurance policy.The ownership is 38 percent among urban householdsbut a low 19 percent among rural households.The survey, which covered 342 towns and almost2,000 villages across 250 districts and 2,255 wards,suggests that Indian households have a strong savinghabit. While income level is an important factor ininfluencing the saving patterns of households,variations in savings behavior are equally decided byeducation level and occupation, said Dr. RajeshShukla, principal author of the report and SeniorFellow at NCAER.

According to the study, 83 percent of the householdssurveyed saved for emergency, while children'seducation (81 percent) was the other key priority.While only 69 percent households saved for old-agefinancial security, 63 percent households said theykept aside money to meet future expenses likemarriage, births and other social ceremonies.

The study also notes that nearly 47 percenthouseholds saved to buy or build a house and asimilar percentage saved to improve or enlarge theirbusiness. Only 22 percent households saved to buyconsumer durable and 18 percent for meetingexpenses towards gifts, donation or pilgrimage. Thesurvey findings confirm the wide disparity betweenurban and rural people. On an average, the urbanIndian earns 85 percent higher than his or her ruralcounterpart, spends 71 percent more and saves nearlydouble - Rs.26, 762 compared with Rs.11, 613- everyyear.

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According to the survey, a person's occupation,education, age, location and landholding directlyinfluence his or her income. Households withgraduates earn 3.5 times more than those withilliterate ones, and incomes nearly double betweenthe ages of 25 and 66. While salaried classhouseholds, which constitute only 18 percent of thetotal households in the country "accounted forgreatest proportion of savings" and are the cream ofurban India, agriculturists with land are the richest inrural areas. Wage laborers are the poorest anywhere,comprising 62 percent of the lowest-incomehouseholds."The highest savings (in terms of per household) arein the 56-65 age group where savings are Rs.21, 196per household, or 25 percent of the annual income,"the study notes. The two main factors responsible forhigher savings with growing age according to thesurvey are motivation to save and the need to meetold-age requirements.The survey also suggests a direct link between theeducation and savings by pointing out thathouseholds headed by graduates had highest level ofsavings in both absolute terms and as a percentage ofincome. The survey notes that households managedby persons in 56-65 age group, kept bulk (57 percent)of their savings in liquid assets, though they alsoinvested the surplus funds in shares and debentures.Interestingly, the survey reveals that the householdsheaded by persons in the age group of 26-35 years,paid more insurance premium than their seniorcounterparts. Households headed by graduates spentmore on buying insurance around 10.2 percent, whilemerely 3.5 percent preferred investing in shares ordebentures, the survey says."Indians prefer to save money in 'in-house savings'rather than 'in banks or investment.' They save moneyfor emergency and any miss happening," the studynotes. The reason behind this is because unlike in thewestern and developed countries, which have thesystem of social security that prevents the poorhouseholds from starvation and ill-social society bygiving social protection and economic support, "thereis no social security in the country (India) for thecitizens of the nation," the study explained.The sample size included 63,016 households, equallydivided between rural and urban areas."The habit of savings is good, but the way of savingsis not good enough as only a meager part of totalsavings come under the government account that isnot enough to conduct various plans properly," saidAhluwalia, commenting on the survey results.

The survey also reveals that 96 percent of thehouseholds cannot survive beyond a year on theircurrent savings in case of loss of income due to someeventuality such as death or disability of the chiefearner. However, a majority of those surveyedexpressed confidence in their financial well-being.Lack of awareness of their financial preparedness forincome loss predicated their ignorance of the moreviable channels for long-term investment. (Survey bySurojit Chatterjee).

V. JUSTIFICATION OF THE STUDYInvestments are defined as “the tradeoff of thepresent consumption for a higher level of futureconsumption”. Those who give up immediatepossession of savings (defer current consumption) inthe expectation of receiving a greater amount infuture are called investors. Whenever a person isinvesting, he is exchanging the present cash outflowwith a future cash inflow. While present is certain,future is uncertain. This means that while the cashoutflow is certain, the future cash inflow is uncertain,and if the future cash inflow is not certain theinvestor is exposed to risk.Risk taking involves the selection of options thatmight result in negative outcomes. All investmentsinvolve risk. Various forms of investment areavailable to an investor. Whether it’s retiring early,saving for children education or paying off a loan,everyone has dreams they can achieve by investingtheir savings. Deciding where to invest depends onthe investors’ attitude towards risk and theirinvestment horizon.Depending on the risk profile of an investor, i.e. ageprofile and expected returns, proportion of eachcategory of the total investment would vary. Forinstance, the risk appetite of a 25 old person would behigher when compared to a 40-year-old workingexecutive. For the former, the equity component islikely to be on the higher side and for the later, thereal estate, fixed deposits and cash component wouldbe proportionately higher. Investment in India hastraditionally meant property, gold and bank deposits.The more risk-taking investors choose equity trading.The post 1991 era has witnessed some vibrantchanges in the Indian business environment. Thenumber of initial public offerings (IPOs) coming in,rising market capitalization, and emergence ofdomestic mutual funds witnessed the changingoutlook of the Indian investment environment. Overthe period, these developments also changed theperception of retail investors towards stock marketinvestment.

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This resulted in a mounting number of retail investorsin Indian stock markets over the last few years, but arecent study on the shareholding pattern of the 30firms has revealed that promoters and institutionalinvestors hold large chunks of shares in a majority ofthe Sensex companies, leaving only a minusculeshare for small investors. In 23 of the 30 Sensexcompanies, shareholding of retail investors is lessthan 15 percent of the total shareholding. The highestretail presence is in Cipla, where small investorsaccount for 24 percent shareholding. Cipla isfollowed by engineering firm Larsen & Toubro(23%) and Tata Steel (21.49%) (Ahmedabad Mirror21st April 2008).This study makes an attempt to analyze the investors’attitude towards secondary market equity investmentsand their preference for online trading overtraditional trading of securities through brokers. It isalso important to know the various factors which areresponsible for the investment decisions underuncertainty. Whether it is broker’s advice orwatching the expert opinions on television orprevious return of the company or therecommendations of friend / relatives or self analysis,all these factors have impact on the investors.Apart from the factors affecting the investmentdecisions, we can easily find that the investorsbehave irrationally in the stock markets. Forexample- As the positive information of excess

subscriptions of an IPO comes, more investors enterthe bandwagon. When prices of the stocks startsoaring, everyone is thinking of the same thing: I amgoing to sell on listing and book the profits. Arefinancial markets so predictable?It is hard to believe that people in the financialmarket, even though they can be very skilled, couldalways process information accurately without lettinghuman nature to affect their behavior. The traditionalfinance theorems and concepts failed to predict themarket behavior.A new area of financial research, Behavioral Finance

is receiving a lot of attention from individual andinstitutional investors. Behavioral finance drawsinputs from the field of psychology and finance in anattempt to understand and explain irrational stockmarket and investor behavior.At the end of March 2010 a total number of 363members were permitted to allow investor’s webbased access to NSE’s trading system. The membersof the exchange in turn had registered 51,43,705 forweb based access as on March 31, 2010. On thecapital market segment, the trading volume of Rs.9,21,380 crore during the year 2009-10 constituting11.13 of total trading volume was routed andexecuted through the internet.The following table 3 shows the growth of internettrading for the fiscal years 2006-07, 2007-08,2008-09and 2009-10).

Table 3. Growth of Internet Trading.

Year EnabledMembers*

RegisteredClients*

Internet TradingVolume (Rs. crore)

% of totalTrading volume

2006-07 242 22,79098 3,37,554 17.352007-08 305 4405,134 668,399 18.822008-09 349 5,627,789 692,789 25.172009-10 363 5,143,705 921,380 11.13

Source: NSE-Fact Book 2010

Chart 3. Growth of Internet Trading: NSE-Fact Book 2010.

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VI. RESEARCH OBJECTIVESFor conducting this research following objectiveswere set:

• To evaluate investors' attitude towards stockmarket operations in cash and derivativesegments.

• To analyze the investors’ preference towardstraditional trading and online trading in cashand derivative segments.

• To study the problems (both actually facedand anticipated) of investors.

• To suggest appropriate strategies toinvestors for taking right investmentdecisions in stock market.

VII. HYPOTHESES

The following Null Hypotheses were set up for thepresent study:1 Retail Investors’ are not aware about

functioning of capital markets.2 Retail Investors do not prefer online trading.3 Investors with speculative attitude are not

influenced by technical factors.4 Heuristic driven biases have no relationship

with speculative attitude among investors.5 Investors’ level of awareness has no

association with heuristic driven biases.6 Heuristic driven biases do not influence

speculative attitude as much as technicalanalysis do.

VIII. RESEARCH METHODOLOGYResearch is an organized and systematic way offinding answers to questions. Redmen and Morydefine research as a “systematized effort to gain newknowledge” (L.V. Redmen and A.V.H. Mory, TheRomance of Research, 1923, p10). It is a careful andsystematic study in the field of knowledge,undertaken to establish facts of principles (Grinnel,1997).Applied research aims at finding a solution for an

immediate problem facing a society or an industrial /business organization, whereas fundamental researchis mainly concerned with generalizations and with theformulation of a theory [15].The aim of this study was to find out factors affectinginvestors’ attitude towards secondary market equityinvestments, hence applied research was carried outas it was designed to apply its findings to a particularsituation. Questions might be designed to gathereither qualitative or quantitative data. By their verynature, quantitative questions are more exact thanqualitative. For example, the word "easy" and"difficult" can mean radically different things todifferent people. So, the approach used wasquantitative and based on collecting, interpreting,summarizing and analyzing numerical data.

Positivist paradigm is the philosophy on which thecurrent study was based and the overall methodologyused was deductive. Within deductive methodologythere are various types of methods like descriptivesurvey and analytical survey. "Descriptive survey isconcerned with identifying and counting thefrequency of a specific population, either at one pointin time or at various times for comparison" (Bell,1997). The descriptive research approach wasconsidered best for the current research because thisstudy intended to accomplish the aims by usingdescriptive statistics.The descriptive research approach gives a variety ofmethods and the one that was considered suitable forthis study was the survey method. Survey methodwas chosen because of the need to get details from alarge number of respondents and as it is not limited toseven or eight respondents as in the case of focusgroups. The research instruments used for the studywere questionnaires.Statistics is indispensable in research work. Most ofthe advancement in knowledge has taken placebecause of experiments conducted with the help ofstatistical methods. In fact, there is hardly anyresearch work today that can find complete withoutstatistical data and statistical methods.Depending upon the source, statistical data areclassified under two categories-1. Primary data2. Secondary dataThe Primary data are those which are collected afreshand for the first time, and thus happen to be originalin character. The secondary data, on the other hand,are those which have already been collected bysomeone else and which have already been passedthrough the statistical process.In this research study, both the primary andsecondary data was used to get adequate informationfor the achievement of the research objectives. Manymethods and procedures have been developed to helpin acquiring data. The basic methods and tools fordata collection for research include observation,questionnaire, interview and projective technique[14].

A. Sampling Method"Sampling is one of the major tools of marketingresearch, which is concerned with collecting,analyzing, and interpreting market data. It involvesthe study, in considerable detail, of relatively smallnumbers of informants taken from a larger group"[1].Sampling is simply the process of learning about thepopulation on the basis of a sample drawn from it.Thus, in the sampling technique instead of every unitof the universe only a part of the universe is studiedand the conclusions are drawn on that basis for theentire universe (Research Methodology, ICFAI April2004).

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The process of sampling involves 4 stages:• Defining the population• Identify a suitable sampling frame based on

the research objectives• Decide on a suitable sample size• Select the most appropriate sampling

technique and obtain the sample.

The various methods of sampling can be groupedunder two broad heads –

• Probability Sampling (Random Sampling)• Non-Probability Sampling (Non-random

Sampling)Probability methods are those in which every item inthe universe has a known chance, or probability, ofbeing chosen for the sample. This implies that theselection of sample items is independent of theperson making the study. Non-Probability samplingmethods are those which do not provide every item inthe universe with a known chance of being includedin the sample [15]. The current study shall be usingnon-probability sampling. With in non-probabilitysampling, convenience sampling would be used. Inconvenience sampling, members of the populationare chosen based on their relative ease of access.

B. Sample SizeThe size of the sample depends on the type of

information required from the survey, and the costinvolved. This means calculating before hand thedegree of accuracy required in the results of thesurvey. Some attributes may be more critical thanothers, and the degree of precision over these shouldbe known. Careful thought should be given to time-constraint. Cost and accuracy are closely linked withthe time taken to complete the survey, and to someextent there is bound to be conflict. Considering allthese factors, the sample size included was 494.

C. ScaleThe study used a variety of questions to find outcomplete information about the topic under research.The questionnaire for the study was drawn from astudy conducted by Dr. Harsh Purohit (2002) on thetheme ‘Investors Attitude towards Stock MarketInvestment with special reference to Bhopal andJaipur Cities’. The study was the first of its kind afterNobel Prize award in behavioral finance to Prof.Kahnemen and experimental economist VernonSmith is seen by many as a vindication of the field ofthe behavior finance.Apart from dichotomous and multiple-choicequestions, the questionnaire also included statementswhich the respondents were required to rate on thebasis of different scales like the Likert scale andrating scale.

D. Secondary data collectionInitially it had been assumed that the secondary datawould be readily available. The secondary data wascollected from the journals, books, magazines,published reports and web portals. Secondary data onthe history of stock market was collected fromofficial websites of Bombay stock exchange(www.bseindia.com) and National Stock Exchange(www.nse-india.com). Business magazines and somenewspapers like ‘The Times of India’, ‘TheEconomic Times’, and ‘The Financial Express’ wereused for the update of current trends in the stockmarket.These days many companies are trying to increasetheir client-investors in Indore and Ujjain cities so thebrochures and pamphlets are easily available andused to understand the online trading concept,intraday trading and procedure for share tradingthrough brokers.Many books, journals related to behavior finance,News channels like ‘CNBC’ & ‘Awaaz’ werefollowed to know the various share marketterminology, Sensex calculation, investment inmutual funds and derivatives. Some reports like RBIbulletin, SEBI guidelines regarding share marketinvestments, CMIE reports, norms for stockexchanges in Indian budget etc. were also used as asecondary data. The collection of data fromsecondary sources was not just limited to the initialstages but continued while primary research was inproress.

E. Primary data collectionPrimary information was collected by theadministration of structured questionnaires to find outinvestors attitude towards share market investments.Present study was also an attempt conducted to findout the trend of online trading in Indian stocks. Forconducting this study, first step was to collect randomsample.As this study was mainly based on primary data, sofor conducting it investors’ responses were collectedthrough pre-determined set of questions in the formof well designed questionnaire. The questionnairehad multiple-choice questions. Considering all thefactors and constraints, the sample size chosen for thecurrent study was 494. The data was collected fromretail investors’ which were categorized on the basisof income levels, gender, age, and awareness level. Inthe second stage total sample was further bifurcatedin two categories-First category included thoseinvestors who deal in internet trading (Net Traders)and second category included those investors whopurchase/sell securities only through brokers(Traditional traders).

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Chart 4. Classification of retail investors’ on the basis of socio economic status for the current research.

The research findings were tabulated and illustratedwith the help of bar diagrams, pie charts and othergraphical representation tools. The hypotheses weretested using the one-tailed Z test. For a smooth andaccurate analysis of the data, MS-Excel was alsoused.

IX. LIST OF CHAPTERS

The research project has been presented in theconventional form as laid down by the Universitywith separate pages for the following - cover sheet,title, acknowledgements, abstract, contents, list oftables and figures.The current chapter of the research is introductory innature which introduces the areas under research, thereasons for choosing the particular area of research,the research aims, method of sampling, datacollection, data analysis, and overall research.The second chapter highlights the factors affectinginvestors’ attitude towards secondary market equityinvestments. Further, already known details aboutinvestors’ behaviour that leading authors havepublished in the print and online media have beendiscussed.The various methods and approaches used forcarrying out the research form a major part of thethird chapter entitled Research Methodology. Thischapter also justifies the reasons for adoption orrejection of different research methods in detail.The fourth chapter presents the processed data usingtables and charts. The hypotheses are tested in thischapter using statistical methods. A summary offindings is also included in the chapter.

Conclusion and Recommendations is the last chapterof the research study. It also includes a discussionabout the whole study and the proposed future work.It comprises a detailed analysis based on the findingsof the research study, and the implications that therecorded theory had on the present study.Apart from the above-mentioned sections, theresearch study also includes a reference list at the endof each chapter and a full-fledged bibliography at theend of the research study. Sample questionnaires andcertain useful appendix are also included at the end.

X. BUSINESS/MANAGEMENTIMPLICATIONS OF THE STUDY

It is the law of gravity. The fall is always sharperthan rise. The benchmark Sensex that took 7 monthsto come down from 15130 (July 2008) to its all-timelow peak of 9724 (Feb 2009,) marks has grown upagain to same level (18237) in 12 months (Jul 2010).Fear of an economic slowdown, inflation, highcommodity prices, reduced capital inflows, selling byforeign institutional investors (FIIs), higher interestcost and global recessionary expectations has a majorimpact on the stock market.It’s a fact that only few investors create immensewealth from a stock market and also manage to keepit for decades. These investors take the rightdecisions and for doing this one needs experience.But experience comes from bad decisions too.Investors who create wealth from equity markets andkeep it for decades, at times for generations, do notpanic when a market falls.

Classification of Retail Investors

Income Level(Rs)

Age (in years) Gender Awareness Level

(1)Upto 2, 00,000

(2)2, 00,001-4, 00,000

(3)4, 00,001-6, 00,000

(4)6, 00,000 & above

(1) Up to 25

(2) 25-40

(3) 40-55

(4) 55 & above

(1)Male

(2)Female

(1)Low

(2)Medium

(3)High

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They learn from their mistakes and capitalize theirinvestments during the next rise. With strugglebecoming intense and areas of achieving betterearnings becoming dilute, it is highly necessary forindividuals to search for newer and better ways ofimproving their return.Managing money is a difficult skill for most people,but it’s one of the most important skills to have. Thecurrent study could help to understand investors’level of satisfaction with their current investmentpatterns and the psychology that works behind equitymarket investment decisions. As Warren Buffett, themost successful investor, writes, “To investsuccessfully over a lifetime does not require astratospheric IQ, unusual business insights, or insideinformation. What’s needed is a sound intellectualframework for making a decision and the ability tokeep emotions from corroding that framework.”

The elaborate literature review, testing of model etc.done in academic researches like the present onecould help in giving key information to retailinvestors and decision makers. Such academicresearches are cost effective and cover extra areasthat are normally not covered in commercialresearch. This study suggests appropriate strategies toinvestors for taking right investment decision in stockmarket and dwells on the basic guidelines forinvestment decisions.This research explores some of the unansweredimportant questions about stock markets that can beexamined and investigated by an emerging field,behavioral finance. It also explains the factorsresponsible for the unusual movements in the stockmarkets, which could not be fully explained by thetheories of traditional finance. This study shallexamine three important attitudes displayed by theinvestors. They are: ‘Expectations’ those investorshave about the future performance of the stockmarket in India; ‘Confidence’ that investors haveregarding their investments; and ‘Herd Instincts’ soinvestors tend to herd together. Present study shallalso analyze the Investors’ preference towardstraditional trading and online trading.

XI. DELIMITATIONS1. The study area of this research is confined to

Indore and Ujjain cities only and may not givesimilar results when generalised to other regions.Investors included here are only literate males &females and not housewives.

2. People have many reasons to invest their money indifferent investment alternatives. It should be notedthat social, cultural, economic, political,demographic factors may strikingly differentiatethe behavior of investors when investing in stockmarket.

3. The current research only covers factors affectinginvestors’ attitude towards secondary market

equity investment in particular and primarymarket & risk free securities in general, thusresults may not be general and applicable toinvestors’ attitude towards primary marketinvestment.

4. The study is limited to retail investors classified onthe basis of income levels, gender, awarenesslevel and age only. Since the study was offinancial nature, the information about onlinetrading preference, investment in secondarymarket, problems faced by the investors etc. arebased on the data provided by the respondents.The reliability and the precision of the findingsare thus based on the information that was madeavailable by them. The investors may not followwhat they have stated in their responses. Thus, thedegree of reliability cannot be taken to be alwayscorrect.

5. One more limitation is that convenient samplingtechnique is used and the sample size is too smallto come to any conclusion.

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