RISK FACTORS INFLUENCING THE

STOCK SELECTION DECISION FOR

RETAIL INVESTORS

Submitted by

Mohit Sharda

Register No: 1021423

Under the guidance of

PROF. CKT.Chandrashekara

Head of the Administration

Christ University institute of Management

A Thesis

Submitted in Partial Fulfillment of

the Requirements for the Award of the Degree of

Master of Business Administration

Bangalore, India 2012

ii

DECLARATION

I, Mohit Sharda, hereby declare that the dissertation entitled risk factors influencing the

stock selection decision for retail investors has been undertaken by me for the award of

Master of Business Administration. I have completed this study under the guidance of

Prof. CKT.Chandrasekhara, Head of the Administration, Institute of Management, Christ

University, Bangalore.

I also declare that this dissertation has not been submitted for the award of any Degree,

Diploma, Associateship or Fellowship or any other title in this University or any other

University.

Place: Bangalore Mohit Sharda

Date: Feb/2012 Register No: 1021423

iii

CERTIFICATE

This is to certify that the dissertation submitted by Mohit Sharda on the title College

risk factors influencing the stock selection decision for retail investors is a record of

research work done by her during the academic year 2011 2012 under my guidance and

supervision in partial fulfillment of the requirements for the award of the degree of

Master of Business Administration. This dissertation has not been submitted for the

award of any Degree, Diploma, Associate ship or Fellowship or any other title in this

University or any other University.

Place: Bangalore Prof. CKT. Chandrasekhara

Date

iv

ACKNOWLEDGEMENT

I am indebted to many people who helped me complete this dissertation.

First, I thank the Vice-Chancellor Dr. (Fr.) Thomas C. Matthew and Pro Vice-Chancellor

Dr. (Fr.) Abraham V. M of Christ University for giving me the opportunity to do this

research.

I thank Fr. Thomas T. V., Director, Christ University Institute of Management and Prof.

C. K. T. Chandrasekhara, Head-Administration for their kind support

I remember Prof. C. K. T. Chandrasekhara with much gratitude for his patience and

motivation, but for which I could not have submitted this work.

I thank my parents for their blessings and constant support, without which this

dissertation would not have seen the light of day.

Mohit Sharda

v

TABLE OF CONTENTS

DECLARATION ii

CERTIFICATE iii

ACKNOWLEDGEMENT iv

TABLE OF CONTENTS v

LIST OF TABLES ix

LIST OF GRAPHS x

ABSTRACT xi

CHAPTER I

INTRODUCTION 2

CHAPTER II

REVIEW OF LITERATURE 4

2.1 INTRODUCTION 5

2.2 SUMMARY OF REVIEW 9

2.3 TABLE OF CONCLUSION 11

CHAPTER III

DESIGN AND METHOD OF STUDY 12

3.1 STATEMENT OF THE PROBLEM 13

vi

3.2 OPERATIONAL DEFINITIONS OF THE VARIABLE 13

3.3 VARIABLES UNDER INVESTIGATION 13

3.4 OBJECTIVE OF THE STUDY 14

3.5 HYPOTHESIS OF THE STUDY 14

3.6 RESEARCH DESIGN 14

CHAPTER IV

DATA ANALYSIS AND INTERPRETATION 16

4.1 DEFINITION OF VARIABLE 17

4.2 GENERAL INFORMATION OF RESPONDENTS 18

4.3 SOCIAL RISK TABLES 20

4.4 POLITICAL RISK TABLES 21

4.5 ECONOMICAL RISK TABLES 23

4.6 REGULATORY RISK TABLES 25

4.7 DESCRIPTIVE ANOVA ANALYSIS OF AGE & PRES RISK 28

4.8 DESCRIPTIVE ANOVA ANALYSIS OF INCOME & PRES RISK 30

4.9 DESCRIPTIVE ANOVA ANALYSIS OF GENDER & PRES RISK 32

4.10 DESCRIPTIVE ANOVA ANALYSIS OF MARITAL STATUS

& PRES RISK 34

4.11DESCRIPTIVE ANOVA ANALYSIS OF INVESTMENT

EXPERIENCE 36

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4.12 DESCRIPTIVE ANOVA ANALYSIS OF INVESTMENT

TYPE 39

CHAPTER V

FINDINGS AND SUGGESTIONS 42

5.1 FINDINGS 43

5.2 SUGGESTIONS 46

CHAPTER VI

CONCLUSION 46

BIBLIOGRAPHY

ANNEXURE

QUESTIONNAIRE

viii

LIST OF TABLES

S.No Title Page

No

3.3 Table of conclusion 11

4.7 Descriptive Anova Analysis Of Age & Pres Risk 28

4.8 Descriptive Anova Analysis Of Income & Pres Risk 30

4.9 Descriptive Anova Analysis Of Gender & Pres Risk 32

4.10 Descriptive Anova Analysis Of Marital Status

& Pres Risk 34

4.11 Descriptive Anova Analysis Of Investment

Experience 36

4.12 Descriptive Anova Analysis Of Investment

Type 39

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LIST OF CHARTS

Sl.No Title Page

No

4.2 General Information 18

4.2.1 Field of investment 18

4.2.2 Market information 19

4.2.4 Advice from broker 19

4.2.5 Types of analysis 20

4.3 Social risk 20

4.3.1 Savings 21

4.3.2 Terrorism 21

4.4 Political risk 21

4.4.1 Scams 22

4.4.2 War 22

4.4.3 Poor Relationship 22

4.5 Economical Risk Tables 23

4.5.2 IIP Output 23

4.5.3 Inflation 23

4.5.4 Interest Rates 24

4.5.5. Dividend Policy 24

4.5.6 GDP Numbers 24

4.5.7 Foreign Currency 25

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4.5.8 Resources 25

4.6 Regulatory Risk Tables 25

4.6.2 SEBI Policies 26

4.6.3 IRDA Policies 26

4.6.3 FDI Flows 26

4.6.4 Other Nations 27

4.6.5 Duration of Investment 27

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ABSTRACT

The retail investors take into consideration their investment needs, goals, objectives and

constraints before making investment decisions. However, it is not possible to make a

successful investment decision at all times. They have to cautiously watch the market

conditions and change their investment options in accordance with their Risk Tolerance

Level. The market conditions can be influenced by both fundamental factors of the

company and external factors such as Social, Political, Economic, Regulatory,

Technological, Environmental and Legal (SPERTEL) that have influence on the values of

equity shares. Hence it becomes important to calculate such external risks and

mitigate/reduce it to the minimal.

As opposed to institutional owners, small investors seldom have access to corporate

boardrooms or discussions and rarely have the opportunity to meet personally with a

company's executives. For this reason, many retail investors tend to regard institutional

ownership of a security as a sign of approval and are easily influenced by institutional

trading activity.

xii

CHAPTER 1

INTRODUCTION

xiii

INTRODUCTION

The purpose of savings differs among individuals. All savers are not investors. The

attitude for investing differs from one saver to another. It is an important variable in

human behaviour. The attitude results in a particular behaviour or desired action.

Research in Behavioral Finance is comparatively less in India, when compared to other

foreign countries. Behavioral Finance assumes that information structure and the

characteristics of market participants systematically influence individuals investment

decisions as well as market outcomes. The Behavioral Finance mainly focuses on how

investors interpret and act on micro and macro information to make investment decisions.

Behavioral Finance is defined by Shleifer (1999) as a rapidly growing area that deals

with the influence of Psychology on the behavior of financial practitioners. The

globalization of financial markets has been increasing the size of the community of retail

investors over the past two decades by providing a wide variety of market and

investment options. Hence, it makes their investment decisions process much more

complex.

A retail investor also known as an "individual investor" or "small investor"

is an individual who purchases securities for his or her own personal account rather than

for an organization. Retail investors typically trade in much smaller amounts than

institutional investors such as mutual funds, pensions, or university endowments.

Retail investing generally occurs through four channels: individual investors, retail

brokers (who act at the direction of these individuals), managed accounts (whereby the

account manager makes the buy and sell decisions for the individual), and investment

clubs (groups of people who pool their money to make investments).

Retail investing activity pales in the shadow of institutional investing activity. Not only

do retail investors make smaller trades, they also tend to trade less frequently than

institutional investors, which account for most of the market's trading volume. However,

the widening use of online trading and better access to financial information has

increased the number of retail investors in recent years.

Retail investors typically exert less influence over corporate decisions than larger,

institutional shareholders. Although there is some controversy over whether a high level

of institutional ownership improves a company's management, there is no disputing the

fact that an institutional shareholder with 10,000 votes usually wields more influence

than an average retail shareholder with just 100 votes.

(Sugiharto et al, 2007). For example, the Government of India publishes the inflation

details every month. This in turn affects the interest rate. The Central Bank (RBI)

regulates by adjusting the interest rate according to the situation or bring a new monetary

xiv

policy if need arises. This has a significant effect on the investors sentiment (Alexander

Kurov 2009).

xv

CHAPTER 2

REVIEW OF LITERATURE

xvi

2.1 REVIEW OF LITERATURE

1. Peter roger Eiving (us)

Research paper on the factors which motivate (or) guide the investment

decisions of the common stock investors:

As per the review, the paper identified the factors as (i) income from dividends (ii) rapid

growth (iii) purposeful investment as a protective outlet of savings (iv) professional

investment management. People are more inclined towards fundamental analysis of the

markets and their personal reasons for investment.

2. Shanmugam

Factors affecting investment decision in Tamil nadu

As per the review, the paper focused its analysis on the investment objective and the

extent of awareness of news affecting investment decision. The study found that the

investors are high risk takers. Investors possessed adequate knowledge of government

regulations, monetary and fiscal policy. The investors made use of this information and

invested accordingly.

3. Nagy, merik

A study on the characteristics of retail investors

As per the review, the paper tested whether there is a significant difference between the

retail investors demographic characteristics and came to a conclusion that investors gave

importance to economical and political risks pertaining to the markets while evaluating

the value of the equity shares. Thus it can be said that people reacted to only certain kind

of risks and were not totally aware of various other risks that affected the markets and

made huge fluctuations.

4. Using demographic and lifestyle analysis to segment individual investors

William e. Warren (university of south Mississippi), Robert e. Stevens, and c.

William mcconkey (northeast Louisiana University)

Date: 1-jan-2010.

Financial analysts journal cfa publication

The paper was based on the profiles of people of different lifestyles and affluences and

captured the value and types of investment holding patterns. The study concluded that the

highly affluent people wanted to diversify their portfolio into various schemes and were

much more aware of the social, political, economical and regulatory risks that were

linked to the markets that they ventured into. The retail investors who had less corpus of

xvii

investment wanted to keep it simple and thus invested in pretty few markets and

instruments so that the complexity and risk is as less as possible.

5. Investors use of analysts recommendations, behaviour research

Ranjani krishnan (Michigan state university) and donna m booker (university of

cincinnati)

volume 14, issue 1 (February 2002)

American accounting association

As per the review, the paper deals with the reaction of retail investors for a short term

where the major objective is to earn small marginal changes in price due to fluctuations

in the market. Hence, the paper revolved around the factors which influenced the short

term investors, and concluded that the investors are more inclined towards the technical

analysis of the markets and analysts recommendation and give less importance to the

fundamental factors of price fluctuation.

6. Factors influencing greek investor behaviour on the athens stock exchange

Anna a merikas (deree college, greece), andreas g merikas (university of the

aegean, greece), george s. Vozikis (university of tulsa), dev prasad (university of

massachusetts, lowell)

Journal of applied business research, volume 20, number 4

As per the review, the paper studied the investing behavior of the investors of the athens

stock exchange for a period of 5 years from 1997-2002. The author made a conclusion

that the social risks and political risks were given much more importance than the

technical and political risks. People of that country were not worried or less prone to the

risks of regulatory and environmental.

7. Factors influencing individual investors behavior: an empirical study of

the uae financial markets

Hussein a hassan (university of sharjah)

Aryan hellas limited 2005

As per the review, the strongest factor that influenced the investors were expected

corporate earnings, get rich quick attitude and past performance of the stocks(technical

analysis). And some of the factors that were insignificant were few factors were found to

be least influencing like (social risks) expected losses in international financial markets,

family member opinion, gut feeling about the economy. This proved that the investors

believed in the statistical decision making and were not bothered about the personal

perception of the markets

xviii

8. Demographics and investment choice among indian investors

Manish mittal and vyas r.k

The iup journal of behavioral finance

December 2007

As per the review, the paper investigated the preferred instruments that retail investors

would choose and on what basis. The salaried class preferred to invest their money in

equities and mutual funds while business classes have shown an inclination to invest their

money in debenture/bonds and real estate/ bullions such knowledge would be highly

useful to the financial advisors as it would help them to advise their clients regarding

investments which are appropriate with respect to their demographic profile.

9. Stock market volatility in india: a case of select scripts

Puja padhi (pondicherry university - department of economics)

Indian institute of capital markets 9th capital markets conference paper

January 9, 2006

As per the review, this paper understands the volatility process at the aggregate and

disaggregates scrips / company level, the study has identified twenty individual

companies belonging to various sectors namely, electrical, machinery, mining, non-

metallic and power plants sector. This article clinches that by using price bands

excessively volatility can be curbed by sebi. As an additional measure of safety

individual price band have also been prescribed.

10. A survey of investors current perceptions and valuation approaches at

jakarta stock exchange

Totok sugiharto, eno l. Inanga (maastricht school of management, the

netherlands), roy sembel (christian university of indonesia, indonesia)

International research journal of finance and economics

As per the review, i found positive inter-relationships among spertel (social, political,

economical, regulatory, technological, environmental, legal risks), fundamental factors

enterprise multiple metric and value of equity shares. The research after using various

statistical tools found that em is strongly correlated with the value of equity shares.

11. Individual investor sentiment and stock returns: what do we learn from

warrant traders?

P schmitz, markus glaser (universitat mannheim)

October 2, 2009

xix

As per the review, the paper measured the individual investor sentiment that is derived

from the market for bank-issued warrants by using vector auto regressive models and

granger causality tests. The paper found that the returns have a negative influence on

Sentiment, while the influence of sentiment on returns is positive for the next trading day.

The research also concluded that the influence of stock market returns on sentiment is

stronger than vice versa.

12. Risk appetite and attitudes of retail investors with special reference to capital market

M. Kannadhasan (Indian institute of management Raipur)

April 23, 2011

As per the review, the paper has examined the attitude and risk bearing capacity of retail

investors. The paper dwells on the behavioral pattern of retail investors, based on their

various dependent variables viz. Gender, age, marital status, educational level, income

level, awareness, preference and risk bearing capacity.

13. Retail investor sentiment and return co movements

Alok kumar (university of miami), charles m.c. Lee (joseph mcdonald

professor of accounting; barclays global investors - advanced strategies and

research)

may 2005

As per the review, behavior and sentiments of the investors vary on a time varying basis

which can be attributable to various risks and personal influences that he/she is exposed

to. The research proved that systematic trading by retail investors could lead to stock

return co -movements beyond the usual risk factors. The paper also found that there is

similarity between the holding patterns different sets of retail investors.

14. The aggregate behaviour of individual investors

Andrew jackson (vinva investment management; london business school;

barclays global investors)

Journal of finance, july, 2003

As per the review, the paper tries to find out the common trading patterns among retail

investors in australia. The paper reveals a strong negative relationship between net flows

and returns indicating that individual investors are negative feedback traders. There is a

negative correlation among various investment patterns across different sets of investors.

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2.2 SUMMARY OF REVIEW

Based on my literature review, the following points need to be understood further:

Highlights 1: literature (availability of market information)

A. Do people make use of the market information to build their portfolio?

B. Do retail investors trade on the recommendations of the brokers without in-depth

analysis of the stocks?

Highlights 2: literature (analysis of markets by retail investors)

A. There are some differences among the retail investors in considering pres

(political, regulatory, economical, social risks) for evaluating the share price of

stocks to create a portfolio.

Highlights 3: literature (risk appetite)

A. How do investors calculate their risk capacity and on what basis?

B. Is there any positive relationship between sentiments and the investment activities

of retail investors?

The retail investors take into consideration their investment needs, goals, objectives and

constraints before making investment decisions. However, it is not possible to make a

successful investment decision at all times. They have to cautiously watch the market

conditions and change their investment options in accordance with their risk tolerance

level. The market conditions can be influenced by both fundamental factors of the

company and external factors such as political, regulatory, social and economic (pres).

Such research would help the fund managers and retail investors to model a portfolio as

per the investors profile.

Hence this research attempts to explore the gap as to know the demographic background

as well as risk appetite of the retail investors which would help in preparing a portfolio

accordingly.

xxi

xxii

xxiii

CHAPTER 3

DESIGN AND METHOD OF STUDY

xxiv

3.1 STATEMENT OF THE PROBLEM

The Retail Investors financial decisions are not always driven by due consideration. The

decisions are taken by them are also often inconsistent. The rationale behind the

behaviour of Retail investors is examined from their attitude and risk bearing capacity.

This study attempts to identify the investors perception of the influence of, Political,

Regulatory, Economical, and Social (PRES) risks on the value of equity shares in the

market.

3.2 OPERATIONAL DEFINITIONS OF THE VARIABLE

Political turmoil

Regulatory issues

Economical scenario

Personal risk

3.3 VARIABLES UNDER INVESTIGATION

Dependant variables:

Gender

Age

Marital status

Annual income

Stock selection decision

Independent variables:

Political risk

Regulatory risk

Economical risk

social risk

xxv

3.4 OBJECTIVE OF THE STUDY

The main objective of the study is to analyze the retail investors perception of the

influence of political, regulatory, economical, social (pres) risks on the value of equity

shares in the market to build their portfolio. There is the need to better understand the

processes by which individual investors formulate their trading decisions, including an

identification of the information sources they use in decision making.

To establish a link between the stock selection decision of the retail investors and the

risks that their portfolio is prone to

3.5 HYPOTHESIS OF THE STUDY

The study will test the following hypothesis.

H0= investors firmly believe that PRES risk factors have NO influence on their portfolio

H1 = retail investors firmly believe that PRES risk factors have influence on their portfolio

3.6 RESEARCH DESIGN

3.6.1 Statistical tools:

The data collected will be analyzed through the application of statistical tool such as one-

way anova, mean and standard deviation.

3.6.2 Methodology

Sources of data: the research design for the study is descriptive in nature. The researcher

depended heavily on primary data. The required data will be collected from the retail

investors living in Bangalore.

3.6.3 Sampling size and procedure:

The sample size would be 100 investors. In order to collect information from the

retail investors, the sampling design was carefully decided and properly chosen for

the study. The investors are mainly classified on the basis of sex, age and net

worth.

xxvi

3.6.4 DURATION OF STUDY

TIMELINE:

SEP-OCT 11: Literature Review & Topic Selection.

NOV-DEC11: Synopsis, Research Design and Questionnaire Design.

DEC11JAN 12: Sample Collection and arranging the collected data for analysis.

JAN-FEB12: Final Analysis, Report Preparation and interpretation.

3.6.5 SAMPLING TECHNIQUE

A Simple Random Sampling Technique is to be used for the study. A simple random

sample is a subset of individuals (a sample) chosen from a larger set (a population). Each

individual is chosen randomly and entirely by chance, such that each individual has the

same probability of being chosen at any stage during the sampling process, and each

subset of k individuals has the same probability of being chosen for the sample as any

other subset of k individuals. This process and technique is known as simple random

sampling.

SAMPLE SELECTION:

Inclusion criteria: Customer who have searched car related information

DATA COLLECTION PROCEDURE:

Basic research: Survey method

Research instrument: Self administered questionnaire

Contact method: Direct/ personal and Online.

xxvii

CHAPTER 4

DATA ANALYSIS AND INTERPRETATION

xxviii

DEFINITION OF THE VARIABLES:

POLITICAL RISK:

The risk that any investment's returns could suffer as a result of political changes or non-

stability in a country. Instability affecting investment returns could stem from a change in

legislative bodies, government, other foreign policy makers, or military control.

Political risk is also called as "geopolitical risk", and becomes more of a factor as the

time horizon of an investment gets longer.

REGULATORY RISK:

This risk is that any change in laws and regulations will materially impact any security,

business, sector or market. A change in laws or regulations made by the government or a

regulatory body can increase the costs of operating a business, reduce the attractiveness

of investment and/or change the competitive landscape.

ECONOMICAL RISK:

Economic risk is the danger that the economy as a whole will perform poorly. When the

whole economy experiences a downturn, it affects stock prices, the job market, and the

prices of consumer products