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INVESTOR BEHAVIOUR
CHAPTER V
INVESTOR BEHAVIOUR
128
Investor behaviour approaches investing as a rational decision making process in which the investor attempts to select a portfolio of
securities. Rational investors form rational expectations about asset
returns, motivated by the maximising principle. They collect available
and relevant information for making decisions. Some investors make
decisions on inadequate information and such decisions may go wrong.
129
Greed and fear have been recognised as the two dominant emotions
that characterise market behaviour. Greed makes individuals grasp and
grab when they buy shares, and fear leads to panic (Jawaharlal 202).
Figure 5.1
Behavioral Phases of Individual Investors
I
j-
/' Greed
/
Hope
Caution
Fear
Se1Fng on
Panic selling
Selling or. Buying Buying on
baince aggressively balance ba!ance
Time
Source: Jawaharlal, P. 202.
When share prices increase, small individual investors become
sellers on balance. When share prices are at peak, they become greedy
and buy securities aggressively. At the point of decline, they do not
give up hope and tend to buy more shares than they sell. But when the
market depresses and reaches the bottom, small investors develop fear
and sell most of their securities.
130
131
Wher
132
133
134
genuine
- changeably.
L The words ' risk' and `uncertainty ' are used inter
But technically their meanings are different. Risk suggests that a
decision- maker know possible consequences of a decision and their
likelihood at the time he makes the decision. Uncertainly on the other
hand, involves a situation about which the likelihood of the possible
outcomes is not known. On the basis of the degree of risk perception,
investors could be classified into risk takers, risk averters and risk
neutrals.
135
The risk takers pay more than the expected value of an asset or
an uncertain future and mostly invest in common stocks and
convertible securities. Risk averters show their preference for
investments of low risk and prefer Government securities, insurance
policies, unit trust certificates, etc. Risk neutrals are willing to pay for
making an investment provided they get a return of an equal value. The
majority of the investors accept medium risk.
selection entails
price rises by 40 per cent , and if the market falls by 20 per cent, the
136
stock price falls by 40 per cent. High `beta' stocks are considered
more risky than low beta stocks.
Figure 5.2
90
80
60
50
40
I
30
20
10
0
1
3
M otives
4. Bonus
5. Tax Benefit
137
Table 5.1
Risk , Return and Liquidity Perceptions of Investors
100 point scale
Liquidity
Return
Risk
Investment
Avenues
Mean
Mean
SD
SD
Mean
Std.Dev
Gold
13.3
16.2
20.5
17.5
44.8
30.1
Real Estate
19.5
15.8
41.7
25.8
22.5
17.3
Shares
45 .2
26.4
39.0
23.6
35.3
32.5
Debenture
22.3
19.5
24.3
19.9
20.9
19.3
Bank Deposits
6.0
13.0
23.3
20.2
64.2
36.6
Com.Deposits
18.3
17.1
24.5
21.5
23.5
23.3
Mutual Fund
23.8
20.2
26.0
19.5
27.9
22.1
Private
46.7
32.8
33.7
25.9
28.1
22.3
2.1
12.8
2.0
12.1
1.9
10.7
Financiers
Others
138
technique has been used for rating these factors. The respondents were
asked to perceive the risk, return and liquidity on different investment
options on a 10- point scale, and later enlarged to a 100- point scale
for easy comparison.
As per data, investment with private financiers has been the most
risky and deposits with banks the least risky. Though equity
investment (shares) shows high level of risk, its level of return is
relatively high. Table 5.1 makes a comparative evaluation of riskreturn-liquidity perception among the various investment avenues.
139
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140
Table 5.3
Reading Habits of Investors-Books
Class
Pre-Degree
Graduate
Post Graduate
Professionals
Others
Total
1-5
6-10
>10
Total
21
22
(95.5)
(4.5)
(8.5)
14
16
(87.5)
(12.5)
(6.2)
87
34
(71.1)
(27.9)
32
13
(68.1)
(27.7)
(4.3)
27
15
(58.7)
(32.6)
(8.7)
(71.4)
(28.6)
(2.7)
186
67
260
(71.5)
(25.8)
(2.3)
(.4)
(100)
122
(8)
(46.9)
47
(18.1)
46
(17.7)
Table 5.3 shows that about 72 per cent of the respondents have not
read even a single book on the subject. On close analysis, we find
clear association between the level of education and reading habits.
People with higher level of education have better reading habits.
1 41
The survey results (table 5.4) show that only one third (34.2%)
of the investors can read and understand the financial statements of
companies such as Balance Sheet and Profit and Loss Account.
Education wise, graduates are in a better position than the postgraduates. Category of investors by profession, bank employees can
read and understand the financial statements. More than 40% of the
professionals also can understand the financial statements. But only
around 20 per cent of the teachers and government employees can read
and understand the financial statements of companies.
Table 5.4
Understanding Financial Statements of Companies
(profession - wise distribution)
Category of
Understand
To some
Do Not
Class
extend
Understand
Total
Bank Employees
27
(57.4)
18
(38.3)
2
(4.3)
47
Teachers
8
(24.2)
17
(51.5)
8
(24.2)
33
Company
10
24
41
em p lo y ees
Government
(24.4)
8
(58.5)
24
(17.1)
5
37
employees
(21.6)
(64.9)
(13.5)
Business
13
(28.3)
10
(41.7)
26
(56.5)
13
(54.2)
7
(15.2)
1
(4.2)
46
'10
(40.0)
9
(4.9)
89
(34.2)
(60.0)
13
(59.1)
141
(54.2)
22
30
(11.5)
260
(100)
Investors
Professional
I:etired
Others
Total
Source : Survey data
Note : Figures in parenthesis show percentages.
24
142
Table 5.5 clearly shows that small investors dominate the stock
market. The majority of the investors are small investors, holding
shares having face value of less than Rs.10,000/-. 68% of the investors
hold less than 10 scrips. Less than 10% hold shares of more than 20
companies.
Table 5.5
Share-holding Pattern of Investors
Shares held
Percentage
Frequency
12
Nil
1- 5---- ----------
- ----- 94
Cumulative %
4.6
4.6
-- -- 36.2
40.8
6 -10
83
31.9
72.7
11 -15
38
14.6
87.3
16 -20
3.5
90.8
24
9.2
100
260
100
100
Ah,jve 20
Total
143
Table 5.6
Debenture Holding Pattern of Investors
Debentures Held
Percentage
Frequency
Cumulative %
143
55.0
55.C
1 -2
57
21.9
76.9
3-5
46
17.7
94.6
6-7
0 .8
95.4
8 - 10
3.5
98.9
Above 10
1.1
100
260
100
100
Nil
Total
Source Survey data.
144
Table 5.7
Investment in Mutual Funds
Frequency
Percentage
153
58.8
Insurance Companies
37
14.2
63
24.2
50
19.2
Mutual Funds
145
Table 5.8
Earlier Investment Pattern of Respondents
Investment Avenues
Frequency
Percentage
Bank Deposits
111
42.7
----- Gold
25 -
---- 9.6
Land
39
15.0
Mutual Funds
85
32.7
Company Deposits
3.1
Private Financiers
10
3.8
Others
65
25.0
146
Table 5.9
Investment Options and Order of preference
Investment Option
Average
Rank
Score
Shares
88.72
Debentures
36.13
Mutual Funds
60.64
The table 5.9 shows that investors have clear and marked
preference for shares to mutual funds and mutual funds to debentures.
This may be attributed to the poor performance of mutual funds and the
weak state of the debt market.
147
Table 5.10
Primary Market Operations
Monthly Income
Occasionally
Never
-^
Regularly
Very
Often
Below 5,000
5,001 - 10,000
10,001 - 15,000
52
(8.3)
(86.7)
19
102
(13.4)
(71.8)
31
(10.0)
(77.5)
(12.5)
(75.0)
(25.0)
15,001 - 20,000
Not Revealed
Total
(5.0)
20
(14.1) (0.7)
(12.5)
(87.5)
29
200
30
(11.2)
(76.9)
(11.5)
(0.4)
14
'Table 5.11
Low
High
Was
High
12
(25.1)
10
Teachers
(30.3)
9
rCompany employees
II
21.9
9
Government
(24.3)
employees
ii
Business
X23.9
2
iProfessionals 1
20
(42.6)
11
33_3)
13
(31.7)
9
24.3
16
(34.8
6
15
(31.9)
12
3.6.4
19
(46.3)
19
51.4)
19
(41.3)
16
(83)
2
(25.0)
2
(63.7)
6
Others
(20._0)
u
(27.3)
(20.0)
8
(36.4)
60.0)
8
(36.4)
61
Total
(23 5)
85
(-? 7)
(43.3)
F ank employees
Retired
114
149
Table 5.12
Risk in Investment in New Issues
Not safe
Safe
Category of
Was
Safe
Investors
14
(29.8)
Bank Employee
Teachers
Company Employee
Govt. Employee
Business
Professional
Retired
Others
Total
20
(42.5
13
(27.7)
16
11
(48.5)
10
24.4
13
(35.1)
18.2)
14
(39.1)
9
(24.3)
33.3
17
(41.5)
15
(40.5)
12
17
17
(26.0)
4
(16.7)
(37.0)
5
(20.5)
(37.0)
15
(62.5)
(20.0)
6
(10.0
10
(70.0)
6
(27.3)__ _ (45.5)
82
77
3( 1.6)
(29.6)
(27.3
101
(38.8)
150
Table 5.13
Net Gain on Primary Market Investment - by Education
Education wise
Gained
classification
Non -matriculate
Pre-Degree
Graduate
Post Graduate
Professional
Others
Total
Not
Class
gained
Total
22
18
(18.2)
(81.8)
11
(31.3)
(68.7)
62
60
(50.8)
(49.2)
17
30
(36.2)
(73.8)
19
27
(41.3)
(58.7)
(14.3)
(85.7)
110
150
260
(42 .3)
(57.7)
100
16
122
47
46
151
Teachers
Company Employees
Govt. Employees
Businessmen
_
Professionals
Not
g aine
Gained
Category of
Investors
Bank employees
22
(46.8
14
--(42.4)
25
(53.2)
19
(57.6)
17
24
41
(41.5
11
29.8
58.5)
26
(7
37
20
26
46
43.5
13
54.2
Retired
Others
Total
Class
Total
47
4
(40.0)
9
40.9
110
(42 .3)
33
---
56.5
11
(45.8)
6
60.0
13
(59.1)
150
(57.7)
24
10
22
260
100
152
Table 5.15
Guidance in Decision making in the Primary Market
Guidance
Average
Rank
Score
Own ----
75.38
Friends
54.92
Media
47.31
Brokers
15.15
Relatives
13.15
Investment
decisi ins in the primary market lack the professional touch in Kerala
153
study
the prospectus
thoroughly.
Table 5.16
Studying Prospectus while Deciding to Apply for New Issues
No
Non-Matriculate
11
50.0
6
(37.5)
17
13.9
4
(8.5)
4
Pre-Degree
Graduate
Post Graduate
Professional
8.7
_
Others
Total
42
(16.2)
Refer
in
detail
_
Just go
through
Refer
in brief
9. 1
3.4
2
(4.5)
4
(25.0)
40
32.8
12
25.8
6
(37.5)
43
(35.2)
20
(42.6)
19
(15.6)
5
(10.6)
3
(2.5)
4
8.5
19
13
Yes
Education - wise
Classification
41.3
6
( 85.7)
84
(32.3)
(28.3)
1
(14.3)
91
(35.0)
13.0
(8.7)
32
(12.3)
11
(4.2)
St
154
Table 5.17
Factors Influencing Primary Market Investment
Factors
Rank
Average
Score
64.04
63.81
49.04
47.19
45.92
44.35
41.15
33.12
15.46
10
11.38
155
Table 5.18
Borrowings for Equity Investment
-10000
101
29
12
-15000
28
11
-20000
(83.3) (16.7)
Above
20000 2 1 1
(50 . 0) (25.0) (25.0)
Not Revealed
Total
(50.0)
(12.5)
(25.0)
(12.5)
179
51
29
(68.8)
(19.6)
(11.2)
(0
156
157
Table 5.19
Secondary Market Operations
Income - wise Distribution
Monthly Income
Below 5000
5001 -10000
10001 -15000
Do not
Bu y
30
Debentures
onl y
Shares
onl y
30
(50.0)
(50.0)
56
84
(39.4)
(59.2)
10
27
(25.0)
(67.5)
(2.5)
(2.5)
15001 -20000
Not Revealed
(50.0)
(50.0)
(25.0)
(62.5)
100
(38.5)
153
(58.8)
2
(1.4)
(16.7)
(83.3)
Above 20000
Both
1
(12.5
1
(0.4)
6
(2.3)
158
Table 5.20
Share Retaining Habits of Investors
Monthly
Income
11
24
More
than
Three
Years
13
(10.0)
(10.0)
(18.3)
(40.0)
(21.7)
11
31
55
38
(7.2)
(4.9)
(21.8)
(38.7)
(26.8)
10
20
(25.0)
(50.0)
(22.5)
(16.7)
(50.0)
2
(50.0)
1
(25.0)
3
(37.5)
2
(25.0)
Below 5000
5001 10000
10001 - 15000
(2.5)
1
(16.7)
(16.7)
15001 - 20000
Three
years
One
year
Three
Months
Till
listing
Above 20000
(25.0)
1
(12.5)
(25.0)
20
16
53
105
66
(7.7)
(6.1)
(20.4)
(40.4)
(25.4)
Not Revealed
Total
About 65.8 per cent of the respondents hold shares for a period
of more than one year . They seem to prefer a steady return from their
investments to windfall gains from speculations .
159
Table 5.21
Perceptions of Indices as Performance Indicators
Positive
Indices
Negative
Misleading
Only an
Total
indication
65
38
37
120
(25.0)
(14.6)
(14.2)
(46.2)
42
31
42
145
(16.2)
(12.0)
(16.2)
(55.8)
32
32
49
147
(12.3)
(12.3)
(18.8)
(56.5)
26
86
41
107
S E Index
(10.0)
(33.0)
(15.8)
(41.2)
Per -
(15.8 )
(18.0)
(16.3 )
( 49.9)
BSE
Sensex
NSE Index
National
Index
Cochin
260
260
260
260
100
centage
160
Table 5.22
Effectiveness of S E B I as the Regulator of Capital Market
Category of Investors
Bank employees
Teachers
Company employees
Govt: employees
Business
Professionals
Retired
Others
Yes
14
(29.8)
4
(12.1)
3
(7.3)
5
13.5
1
(2.2)
2
(8.3)
_
35
(13.5)
No
Very
Class
Little
Total
10
(21.3)
27
(21.2)
25
(61.0)
16
(43.2)
27
(58.7)
23
48.9
22
(66.7)
13
(31.7)
16
(43.2)
18
75.0
47
24
18
75.0
4
(60.0)
101
(38.8)
(40.0)
129
(47.7)
16.7
33
41
37
24
10
260
(100)
More than 90 per cent of the investors are aware of the existence
of Securities and Exchange Board of India (S E B I). But there is a
strong feeling among the investors that SEBI has not succeeded in
regulating the capital market. Only a small minority (13.5%) believes
that S E B I has been successful.
161
Table 5.23
Opinion of Investors about Stock Brokers
Opinion
Well Informed
Not well Informed
Total
Honest
1_'-ishonest
Total
Prompt Payment .
Dela in Payment
Total
Reliable
Not Reliable
_ Total
Helpful
Not Helpful
Total
Frequency
42
218
260
123
137
260
44
216
260
147
113
260
193
67
260
Per centage
16.2
83.8
100
47.3
52.7
100
16.9
83.1
100
56.5
43.5
100
74.2
25.8
100
162
Table 5.24
term Courses on Capital Market
Attitude on Attending ShortNot
Category of Interested
Investors Interested
Inclined
Bank employees 16 9 22
(34.0) (19.1) (46.8)
Teachers 7 13 13
21.2 (39.4) 39.4
Company 12 6 23
employees 29.3 14.6 56.1
Govt: employees 9 5 23
24.3 13.5 (62.2
Business 5 17 24
37.0 52.2
(10.9
5
Professional
7 12
20.8 .29.2 X50.0
T o tal
47
33
41
37
46
24
Total
ercentage
65
60
(25.0)
(23.1)
13 5
260
( 51.9) 1
( 100)
163
Table 5.25
Investor Preference in Kerala Based Companies by Profession
Category of
Not
Interested
Total
5
(10.6)
10
(30.3)
8
(19.5)
5
(13.5)
10
(21.7)
5
20.8
2
(20.0)
8
(32.4)
53
interested
42
(89.4)
23
(69.7)
33
80.5
32
(86.6)
36
(78.3)
19
(79.2)
8
(80.0)
14
(67.6)
207
Percentage
(20.4)
(79.6)
Investors
Bank employees
Teachers
Company employees
Govt: employees
Business
Professional
Retired
Others
Total
47
33
41
37
46
24
10
22
260
(100)
1 64
Table 5.26
of
Investors
to
Continue in the Capital Market
Intentions
Category of
Investors
Probably
Certainly
No
Yes
Bank employees
17.0
Teachers
Company employees
Govt: employees
Business
4
(12.1)
8
(19.5)
3
( 8.1 )
10
(21.7)
6
Professional
Total
Certainly
26
55.3
20
60.6
26
63.4
31
83.8
27
58.7
13
(27.7)
9
27.3
7
17.1
3
8.1
9
19.6
47
24
16
66.7
33
41
37
46
8.3
7
70.0
15
(68.2)
168
10
3
(13.6)
47
22
Total
(25.0)
2
(20.0)
4
18.2
45
260
Percentage
( 17.3)
(64.6)
(18.1)
(100)
Retired
Others
10.0
165
highly
by the
several
times.
166
167
5.8. Conclusion
168
good number of investors depend on their friends and the media for
investment guidance.
Small investors dominate the capital market, and the debentureholder density is remarkably low in Kerala. Debt market is an area
where the investors can fearlessly tread in. An investor who buys a
debenture is lending money to the issuing company or institution at a
given rate of interest. The debenture- holder can sell the instrument in
the market or may hold it till the repayment date. Investment in debt
instruments of good quality can provide a steady guaranteed income
combined with safety of the principal. The interest rate on such bonds
is 4 - 5 per- centage points higher that on bank deposits. A good
number of investors who are habitual depositors in banks have entered
the capital market through the Mutual Funds. The majority does not
borrow for making investment in the capital market.
The Primary market has been the favourite of the vast majority
of investors. About 43.8 per cent of the investors expressed that they
had been receiving higher return from the primary market. Only less
than a quarter of the total number of investors have stated that the
return from the primary market has been higher. It guic:e, us to the
reason for the recent sluggishness in the primary market. Despite the
169
rapid growth of the market in the eighties and the early nineties, the
prolonged sluggishness of primary market during the latter part of the
nineties has been a matter of serious concern.
of stock
price indices and the regulator , SEBI itself. They also doubt the
professional competence of stock-brokers. The study also reveals
that the majority of the investors are not inclined to invest in Kerala
based regional companies and some of them have already withdrawn
from the market . The majority of the investors have revealed their
willingness to learn and readiness to attend awareness programmes and
even short- term courses on capital market . Timely
and right