Escolar Documentos
Profissional Documentos
Cultura Documentos
CHAPTER-1
INTRODUCTION:
In todays scenario there has been a major change i.e. economic prosperity all over. The entire
world is talking about the robust growth rates in this part of the world. The availability of huge
investible surplus is due to higher income levels and booming stock markets. The investors
with higher risk appetite want to experiment and try new and exotic products in the name of
diversification. This has resulted in emergence of new options within the same or fresh asset
classes. The common perception of investors is to buy when the market supports in uptrend
and not to invest in the falling time. They wait for the stabilization in the market. Markets
have personalities because investors have emotions. Markets are ultimately driven by people
and stock prices are what individuals make them out to be. People have a tendency to see their
1.1)
Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the
close of 18th century when the East India Company used to transact loan securities. In the
1830s, trading on corporate stocks and shares in Bank and Cotton presses took place in
1
An empirical study on investors preference between equity and debt
Bombay. Though the trading was broad but the brokers were hardly half dozen during 1840
and 1850.
An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town
Hall of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. This
banyan tree still stands in the Horniman Circle Park, Mumbai. In 1860, the exchange
flourished with 60 brokers. In fact the 'Share Mania' in India began with the American Civil
War broke and the cotton supply from the US to Europe stopped. Further the brokers
increased to 250. The informal group of stockbrokers organized themselves as the Native
Share and Stockbrokers Association which, in 1875, was formally organized as the Bombay
BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which the
BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg and
Hammam Street in downtown Mumbai) was acquired, and a building was constructed and
occupied in 1930.Premchand Roychand was a leading stockbroker of that time, and he assisted
in setting out traditions, conventions, and procedures for the trading of stocks at Bombay
Stock Exchange and they are still being followed. Several stock broking firms in Mumbai
were family run enterprises, and were named after the heads of the family.
The following is the list of some of the initial members of the exchange, and who are still
D.S. Prabhudas & Company (now known as DSP, and a joint venture partner with Merrill
Lynch) Jamnadas Morarjee (now known as JM) Champaklal Devidas (now called CIFCO
Finance
2
An empirical study on investors preference between equity and debt
In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock
exchange in the country under the Securities Contracts (Regulation) Act. The most decisive
period in the history of the BSE took place after 1992. In the aftermath of a major scandal with
market manipulation involving a BSE member named Harshad Mehta, BSE responded to calls
for reform with intransigence. The foot-dragging by the BSE helped radicalize the position of
the government, which encouraged the creation of the National Stock Exchange (NSE), which
NSE started trading on 4 November 1994. Within less than a year, NSE turnover exceeded the
BSE. BSE rapidly automated, but it never caught up with NSE spot market turnover. The
second strategic failure at BSE came in the following two years. NSE embarked on the launch
of equity derivatives trading. BSE responded by political effort, with a friendly SEBI
chairman (D. R. Mehta) aimed at blocking equity derivatives trading. The BSE and D. R.
Mehta succeeded in delaying the onset of equity derivatives trading by roughly five years. But
this trading, and the accompanying shift of the spot market to rolling settlement, did come
along in 2000 and 2001 - helped by another major scandal at BSE involving the then President
NSE scored nearly 100% market share in the runaway success of equity derivatives trading,
thus consigning BSE into clearly second place. Today, NSE has roughly 66% of equity spot
turnover and roughly 100% of equity derivatives turnover. Stock Exchange provides a trading
The different segments of the Indian Financial System (IFS) are monitored and controlled by
statutory bodies called Regulatory institutions. These Institutions have been given adequate
powers by legal acts or by acts of parliament to enable them to supervise the segments
3
An empirical study on investors preference between equity and debt
assigned to them. It is the duty of the regulator to ensure that the players in the segment work
transparency of operations and do not act against national interests. At present, the IFS has
Reserve Bank of India, the Central Bank of the country, is at the heart of the Indian Financial
and Monetary system. It was established on April 1, 1935 as a private shareholders' institution
under the Reserve Bank of India Act 1934. It was nationalized in January 1949, under the
Reserve Bank (Transfer to Public Ownership) of India Act, 1948. This act empowers the
central government, in consultation with the Governor of the Bank; to issue such directions to
RBI as might be considered necessary in the public interest. A Central Board of Directors with
20 members consisting of the Governor and the Deputy Governors governs RBI. The
Governor and the deputy Governors of the Bank are Government of India appointees.
Maintaining financial stability to enable growth of sound Financial Institutions. This should,
in turn, enable monetary stability and allow economic units to carry out their business with
confidence.
4
An empirical study on investors preference between equity and debt
Mai
ntaining monetary stability for growth and proper functioning of a mixed economic system in
the country.
To
maintain a stable payments and currency system and to facilitate safe and efficient execution
of financial transactions.
To
promote a stable financial structure of markets and systems and to help them operate with
optimum efficiency
To
regulate the money and credit supply in the economy to help maintain price stability to a
reasonable extent.
The SEBI was established on April 12, 1988 through an administrative order, but it became a
statutory and really powerful organization only in 1992 when the Controller of Capital Issues
was abolished. Government of India (GOI) issued an ordinance on 30th Jan 1992 and pursuant
to this ordinance SEBI was set up on 21st Feb 1992. The SEBI Act replaced this ordinance on
The regulatory powers of the SEBI were increased through the Securities Laws (Amendment)
Ordinance of January 1995, which was subsequently replaced by an Act of Parliament. SEBI
is under the overall control of the Ministry of Finance. Its Head Office is in Mumbai (formerly
Bombay). It has since become a very important constituent of the financial regulatory
framework in India.
5
An empirical study on investors preference between equity and debt
OBJECTIVE:
SEBI was constituted to protect the interests of investors in securities and to promote the
Regulating the business in stock exchanges and any other securities markets.
Registering and regulating the working of stockbrokers, sub-brokers, share transfer agents,
underwriters, portfolio managers, investment advisers and such other intermediaries who may
Reg
istering and regulating the working of collective investment schemes, including mutual funds.
Pro
Pro
Pro
Pro
Reg
6
An empirical study on investors preference between equity and debt
Cal
ling for information, undertaking inspection, conducting enquiries and audits of the stock
The investment decision is affected by many factors. The following are the factors which
1) Ti
me Horizon
One of the most important factors for investors when choosing investments is how long their
money will remain invested. Investors with short time horizons usually prefer conservative
investments with less chance of going down in value to make sure their money is available
when they need it. Short time horizon investment goals such as saving for a down-payment
may call for a low-risk and low-return term deposit. Investors with longer time frames to meet
their goals may choose riskier investments, as there is a longer time for investments to recoup
short-term losses should they occur. A retirement plan for someone in her twenties has a
longer time horizon and may be better suited for investments with higher potential returns and
risk.
2) Ris
k Tolerance
Risk tolerance refers to how comfortable an investor would be should the value of his
investment decline significantly. Higher risk investments also have the potential for higher
returns, while lower risk investments are more conservative and usually have lower returns.
An investor with a higher risk tolerance is willing to take the chance of losing money for the
7
An empirical study on investors preference between equity and debt
3) Inv
estment Knowledge
An investor's experience and knowledge are important factors in her investment choices.
Novice investors may choose to rely on the advice of family, friends or an investment adviser
when selecting investments. More experienced investors often choose their own investments.
Understanding the risks involved and potential investment outcomes helps them decide if
4) Inc
An individual's income and net worth are also important factors in making investment choices.
Purchasing certain equity investments, such as stock, often requires thousands of dollars of
capital, while you can purchase mutual funds with a few hundred dollars. New investment
plans for young investors with limited incomes often are set up with contributions of less than
$100 a month directed to a mutual fund composed of stocks and bonds of many different
issuers. Bonds, term deposits and guaranteed investment certificates usually have a minimum
purchase amount of at least $1,000. Investors with larger amounts of capital have access to a
wider range of investment choices, while new investors or those with a lower net worth have a
limited selection.
5) Pas
t market trends
Sometimes history repeats itself; sometimes markets learn from their mistakes. You need to
understand how various asset classes have performed in the past before planning your finances
8
An empirical study on investors preference between equity and debt
A financial market is a broad term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial
markets are typically defined by having transparent pricing, basic regulations on trading, costs
and fees, and market forces determining the prices of securities that trade.
Financial markets can be found in nearly every nation in the world. Investors have access to a
large number of financial markets and exchanges representing a vast array of financial
products. Some of these markets have always been open to private investors; others remained
the exclusive domain of major international banks and financial professionals until the very
end of the
twentieth
century.
FINANCIAL MARKETS
A) Money
markets:-
the
MARKETS MARKETS financial
market in which
financial
EQUITY DEBT
instruments with high liquidity and very short maturities are traded. The money market is used
by participants as a means for borrowing and lending in the short term, from several days to
just under a year. Money market securities consist of negotiable certificates of deposit (CDs),
bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds
9
An empirical study on investors preference between equity and debt
The money market is used by a wide array of participants, from a company raising money by
selling commercial paper into the market to an investor purchasing CDs as a safe place to park
money in the short term. The money market is typically seen as a safe place to put money due
the highly liquid nature of the securities and short maturities, but there are risks in the market
that any investor needs to be aware of including the risk of default on securities such as
commercial paper.
B) Capital markets:-
Capital Market is the market in which long term financial instruments, such as bonds, equities,
mutual funds and derivative instruments are traded. Capital Market serves as an alternative for
a company's capital resources and public investment. It also facilitates the infrastructures
needed for the selling and buying process and other related activities.
Capital Markets can be defined as the activity of trading and offering securities to the public,
the activity of a public company with respect to securities it has issued, and the activities of
Capital Market plays an important role in the economy of a country because it serves two
1) Cap
ital Market serves as an alternative for a company's capital resources. The capital gained from
the public offering can be used for the company's business development, expansion, and so on
2)
Capital Market serves as an alternative for public investment. People could invest their money
10
An empirical study on investors preference between equity and debt
sale of securities - stocks and bonds in the company's name. These are bought and sold in the
capital markets.
Equity market is one of the key sectors of financial markets where long term financial
instruments are traded. The purpose of equity instruments issued by corporations is to raise
funds for the firms. The provider of the funds is granted a residual claim on the companys
income, and becomes one of the owners of the firm. For market participants equity securities
mean holding wealth as well as a source of new finance, and are of great significance for
i.Primary Market is the market for new securities issues and is facilitated by underwriting
groups. The companies sell their securities to the public directly to the investors through the
underwriters (normally investment banks for stock and bond issuance). When the firm is
issuing shares for the very first time, it is called Initial Public Offering (IPO). New shares
11
An empirical study on investors preference between equity and debt
issued by firms whose shares are already trading in the market are called seasoned or
secondary issues. Issuing company receives cash from the sale and uses it to expand or fund
the operations. After the initial sale, the securities trading will be conducted on the secondary
market.
ii.Secondary market, also known as the aftermarket, is the market where the trading of the
from another investor instead of the issuer. It is important that the secondary market provides
liquidity and therefore provides continuous information about the market price of the
securities
iii.Stock market: Stock Market is a market where the trading of company stock, both listed
securities and unlisted takes place. It is different from stock exchange because it includes all
the national stock exchanges of the country. For example, we use the term, "the stock market
Stock Exchanges are an organized market place, either corporation or mutual organization,
where members of the organization gather to trade company stocks or other securities. The
members may act either as agents for their customers, or as principals for their own accounts.
Stock exchanges also facilitates for the issue and redemption of securities and other financial
instruments including the payment of income and dividends. The record keeping is central but
trade is linked to such physical place because modern markets are computerized. The trade on
an exchange is only by members and stock broker do have a seat on the exchange.
A) Fea
12
An empirical study on investors preference between equity and debt
(i) Equity share capital remains permanently with the company. It is returned only when the
(ii) Equity shareholders have voting rights and elect the management of the company.
(iii) The rate of dividend on equity capital depends upon the availability of surplus funds.
B)
1.6)DEBT MARKET
Debt markets are used by both firms and governments to raise funds for long-term purposes,
though most investment by firms is financed by retained profits. Bonds are long-term
borrowing instruments for the issuer. Major issuers of bonds are governments and firms,
which issue corporate bonds Corporate as well as government bonds vary very considerably in
13
An empirical study on investors preference between equity and debt
terms of their risk. Some corporate bonds are secured against assets of the company that
issued them, whereas other bonds are unsecured. Bonds secured on the assets of the issuing
company are known as debentures. Bonds that are not secured are referred to as loan stock.
Retail trading in Central Government Securities commenced on January 16, 2003. The
transaction sizes in the Wholesale. Debt Market are so large that individual investors cant
participate in it. So there is a separate market called the Retail Debt Market for individual
investors. But the retail investors dont have much of a choice as far as investment in the Debt
Market is concerned. NSE has introduced a trading facility through which retail investors can
buy and sell government securities from different locations in the country through registered
NSE brokers in the same manner as they have been buying and selling equities. This market is
This segment provides a trading platform for a wide range of Fixed Income securities that
includes Central government securities, Treasury Bills (T-bills), State Development Loans
(SDLs), bonds issued by Public Sector Undertakings (PSUs), Floating Rate Bonds (FRBs),
Zero Coupon Bonds (ZCBs), Index Bonds, Commercial Papers (CPs), Certicates of Deposit
(CDs), Corporate Debentures, SLR and non-SLR bonds issued by Financial Institutions (FIs),
The Commercial Banks and the Financial Institutions are the most prominent participants in
the Wholesale Debt Market in India. During the past few years, the investor base has been
widened to include Co-operative Banks, Investment Institution, Cash rich corporate, Non-
14
An empirical study on investors preference between equity and debt
A) Fea
and principal.
Ma
turity: Maturity of a bond refers to the date, on which the bond matures, which is the date on
Co
upon: Coupon refers to the periodic interest payments that are made by the borrower (who is
Pri
ncipal: Principal is the amount that has been borrowed, and is also called the par value or face
15
An empirical study on investors preference between equity and debt
B) Ad
1 Safety No control
4 Liquidity Repayment
upside
equity
16
An empirical study on investors preference between equity and debt
increasing debt
borrower
deductible
Generally, capital raised for new businesses takes one of two structures: debt or equity. Debt
capital is raised in the form of a loan or promissory note to be paid back at some point in the
future usually with interest. Conversely, equity is issued as stock in a company, representing a
17
An empirical study on investors preference between equity and debt
Investing in Debt:
In a debt financing, there are two parties to the transaction, the debtor and the creditor. In
exchange for capital, the company (debtor) will issue a loan or promissory note to the investor
(creditor). The documents governing and representing the loan will outline the complete
provisions of the transaction; however, there are a handful of key terms investors should
Interest rate: the percentage rate, usually quoted annually, at which interest is paid by the
Interest: the cash paid to the creditor by the debtor until loan maturity calculated as (interest
Amortization: the act of paying the principal balance over time between the issuance of the
18
An empirical study on investors preference between equity and debt
Maturity: the date at which the outstanding principal balance must be paid and returned to a
creditor in full.
An attractive aspect of debt financing is current income generated through interest payments
over the life of the loan. Typically, interest is paid to creditors on a quarterly or monthly basis
providing cash flow to investors while the principal is outstanding. Principal can be amortized;
meaning paid in installments over the life of the loan, or paid in full at maturity, known as a
bullet maturity.
Investing in Equity:
When an investor makes an equity investment, he or she is issued shares in exchange for
capital and becomes a shareholder, or owner, of the company. There are two types of equity
securities routinely used in financing new businesses: preferred and common. As owners of a
company, both common and preferred shareholders have voting rights related to the board of
directors, ultimately influencing control over the companys activities and direction.
While the equity portion of a publicly traded companys capital structure will more heavily
lean towards common, venture capital investors typically utilize a preferred equity structure
due to certain rights and privileges afforded preferred shareholders, most notably a liquidation
preference. Prior to making an investment in preferred equity its important to understand the
Dividends:
Preferred shareholders are typically entitled to a dividend, if and when declared by the board
of directors, before any dividends are paid to common shareholders. Dividends for preferred
19
An empirical study on investors preference between equity and debt
shareholders are established at a percent of the principal, similar to an interest paying debt
Liquidation Preference:
company, preferred shareholders receive back at least the original investment value and often
times a multiple thereof before any distributions are made to common shareholders. A
provisions whereby preferred shareholders will receive a multiple of the original purchase
price and then participate ratably on an as-converted basis in the remaining proceeds of the
liquidity event. As-converted simply refers to the preferred shareholders participation if each
Conversion Features:
Most always preferred shares are convertible into common shares at the option of the preferred
shareholder at a 1:1 conversion ratio. There are several instances where conversion into
company at a value well exceeding the liquidation preferences, where common shareholders
receive a greater amount of the acquisition proceeds. Some preferred structures include
automatic conversion provisions where if the company is executing a Qualified Initial Public
Offering above a certain valuation threshold, preferred shares are converted into common to
20
An empirical study on investors preference between equity and debt
Pay-to-Play:
Pay-to-play provisions are used to incentivize early investors to participate in future financing
future financing round of the company, the investor could lose certain rights and privileges
associated with preferred stock. In a stricter construct, if an investor does not participate in his
or her pro rata participation in a future financing round, the preferred stock could be converted
Board of Directors:
In a preferred equity investment, investors will negotiate for the ability to join the board of
directors in order to influence company direction and serve as a proxy for preferred
shareholders. By taking a board seat, investors can actively monitor activities of the company,
ensuring the companys actions are in the best interest of investors and employees.
While additional terms are found in a typical preferred equity financing, the few listed above
serve as the primary reasoning behind venture capital investors pursuing a preferred stock
Common stock ranks as the lowest priority in a companys capital structure, and consequently,
is often the class of stock held by company founders and employees. While common
stockholders are afforded certain voting rights, economic participation in the event of a
cash distributions. Given its relative rank in the capital structure, common stockholders often
21
An empirical study on investors preference between equity and debt
assume the most risk of any investor class in a given company, while potentially reaping the
greatest rewards
While debt investments can provide a stable cash flow stream and security for investors,
participation in value expansion, and return on investment, is capped at the interest and
principal payments outlined in the financing documents. By taking on more risk as an equity
investor, one can economically participate in a companys value creation activities providing
an enhanced return profile relative to a companys debt offerings. Given this dynamic, several
early stage venture capital investors utilize a convertible note structure, a financial product that
CHAPTER-2
REVIEW OF LITERATURE
1) Yo
on Je Cho (1998) showed in his study that increasing turnover figures in the Indian stock
22
An empirical study on investors preference between equity and debt
exchanges from 1994-95 to 1996-97, implying that they are dominated by speculative
investments, which is not unusual in emerging markets. However, trading volumes in the
Indian capital market are fairly large compared to those in other emerging markets. The
substantial increase in turnover may be attributed primarily to the expansion of the NSEs
trading network. But this also reflects the fact that the Indian stock market is dominated by
speculative investments for short-term capital gains, rather than long-term investment.
2) Ab
dulla Yameen (2001) delivered massage, investors will need to be alert to any new
development in capital market and take advantage of the Investor Education and Awareness
Campaign program which to be undertaken by the Capital Market Section to acquaint of the
risks and rewards of investing on the Capital market. Speech was also focused on to create a
new breed of financial intermediaries, which will deal on the market for their clients. These
operations, techniques, law and companies valuation. Investors depend to a large extent on
their professional advice when investing on the market. Furthermore, these intermediaries
must be men of integrity and honesty as they would deal with clients money Confidence of
3) P.
M. Deleep Kumar and G. Raju (2001) showed that the capital market is becoming more and
more risky and complex in nature so that ordinary investors are unable to keep track of its
movement and direction. The study revealed that the Indian market is probably more volatile
than developed country markets, which is probably why a much higher proportion of savings
23
An empirical study on investors preference between equity and debt
4) S.
M. Imamual Haque and Khan Ashfaq Ahmad (2002) argued that the sluggish trends in
Savings for retirement essential seek long term growth and for that investment in equity is
desirable. It is a well-established fact that investments in equities give higher returns than debt
5) Sw
arup K. S. (2003) empirically found that equity investors first enter capital market though
investment in primary market. The main reason for slump in equity offering is lack of investor
confidence in the primary market. It appeared from the analysis that the investors give
importance to own analysis as compared to brokers advice. They also consider market price
measures in terms of regulatory, policy level and market oriented were suggested to improve
6) Ley
la enturk Ozer, Azize Ergeneli and Mehmet Baha Karan (2004) studied that the risk factor is
one of the main determinants of investment decisions. Market participants that are rational
investors ultimately should receive greater returns from more risky investments. They also
concluded that the crisis and resulting deep recession in 2002 changed many things, including
volume of Istanbul Stock Exchange (ISE), the number of individual investors reduced and
24
An empirical study on investors preference between equity and debt
7) Raj
eswari, T. R. and Moorthy, V. E. R. (2005) said that expectations of the investors influenced
by their perception and human generally relate perception to action. The study revealed that
the most preferred vehicle is bank deposit with mutual funds and equity on fourth and sixth
respectively. The survey also revealed that the investment decision is made by investors on
their own, and other sources influencing their selection decision are newspapers, magazine,
8) J.
K. Nayak (2006) interpreted the preferred mode of investment is first equity, banks, mutual
fund and then any other in a descending order. It means Investors faith has increased and their
risk taking ability has also increased. One thing that could be drawn from this study is that
problems are mostly broker related and therefore that is one area where reforms are required.
The investors feel that the amount of knowledge available on the equity market is not
satisfactory. Investors, it appears, need to be educated more. Investors still considered the
capital market as highly risky. But from the investment pattern from the descriptive statistics it
seems that the number of people willing to invest in capital market has increased.
9) Phil
ipp Schmitz and Martin Weber (2007) exposed that the trading behavior is also influenced if
the underlying reaches some exceptional prices. The probability to buy calls is positively
related to the holding of the underlying in the portfolio, meaning that investors tend to
leverage their stock positions, while the relation between put purchases and portfolio holdings
of the underlying is negative. They also showed higher option market trading activity is
25
An empirical study on investors preference between equity and debt
positively correlated with past returns and volatility, and negatively correlated with book-to-
market ratios. In addition they report that investors open and close long and short call
positions if past week's return is positive and write puts as well as close bought and written put
10) B.
Das, Ms. S. Mohanty and N. Chandra Shil (2008) studied the behavior of the investors in the
selection of investment vehicles. Retail investors face a lot of problem in the stock market.
Empirically they found and concluded which are valuable for both the investors and the
companies having such investment opportunities. First, different investment avenues do not
provide the same level of satisfaction. And majority of investors are from younger group.
11) Pra
sanna P. K. (2008) empirically fond that foreign investors invested more in companies with a
higher volume of shares owned by general public. Foreign investors choose the companies
where family shareholding of promoters is not essential. The study concluded that corporate
performance is the major influencing factor for investment decision for any investor. As far as
financial performance is concerned the share return and earnings per share are significant
12) Ga
urav Kabra, Prashant Mishra and Manoj Dash (2010) studied key factors influencing
investment behaviour and ways these factors impacts investment risk tolerance and decision
making process among men and women and those different age groups. They said that not all
investments will be profitable, as investor will not always make the correct investment
26
An empirical study on investors preference between equity and debt
decisions over the period of years. Through evidence they proved that security as the most
important criterion; there is no significant difference of security, opinion, hedging in all age
group. But there is significant difference of awareness, benefits and duration in all age group.
From the empirical results they concluded the modern investor is a mature and adequately
groomed person.
13) RR
Rajamohan (2010) analyzed the role of the financial knowledge is important in decision
making in information intensive assets like stocks and other risky securities. Hence, reading
habit, as a proxy for financial knowledge. Younger people have greater labor flexibility than
older people; if the returns on their investments turn out to be low, they could work more or
retire later. Hence age an important factor to be considered in household portfolio analysis.
14) M.
Sathish, K. J. Naveen and V. Jeevanantham (2011) studied in the options available to investors
are different and the factors motivating the investors to invest are governed by their socio-
economic. They argued that instead of investing directly, the investors particularly, small
investors may go for indirect investment because they may not be in a position to undertake
fundamental and technical analysis before they decide about their investment options. Their
empirical study showed that majority of the investors of mutual funds is also belongs to
equities who give the first preference to that avenue which gives good return. From the study,
concluded that lack of knowledge as the primary reason for not investing in investment
vehicle.
27
An empirical study on investors preference between equity and debt
15) S.
Gupta, P. Chawla and S. Harkant (2011) stated financial markets are constantly becoming
more efficient providing more promising solutions to the investors. Study also proved that
occupation of the investor is not affected in investment decision. The most preferred
investment avenue is insurance with least equity market. The study also argued that return on
investment and safeties are the most preferred attributes for the investment decision instead of
liquidity.
16) S.
Saravanakumar, S. Gunasekaran and R. Aarthy (2011) showed the upswing in capital market
allows the investors to harvest handsome return in their investments, but day-trader in stock
market hard to take advantage in bullish and bearish market conditions by holding long or
short positions. Now the derivative instruments offer them to hedge against the adverse
conditions in the stock market. They argued that secondary market is the most preferred than
primary market and cash market is the most preferred market than derivatives market because
of high risk when derivatives market is preferred than cash market for higher return.
17) Bha
t Abass Mohd, Dar Ahmad Fayaz (2013) studied the role of emotions in individual investment
behavior describe and conduct a research on what factors, investing characteristics, and
decision-making processes affected individual investors and analyzed the emotional factors
18) It is
said that people save for future contingencies and would like to see their savings grow. In
28
An empirical study on investors preference between equity and debt
order to fulfill the objective people look forward for different investment avenues. A
behavioral finance perspective or school, which is made from psychological and financial
integration, believes that psychology plays an important role in financial decision. Since
cognitive errors and distortions impact investments' theories, therefore, they will also
influence financial options. (Kumaran Sunitha 2013) Investors do not act wisely in taking
decisions relating to investment. They have certain weaknesses like cognitive and emotional
which take a predominating role in taking investment decision of individuals. They have
behavioral biases in the event of taking investment decision.(Harikant Dr. D & Pragathi B) It
is seemingly necessary for the market makers to understand the behavior of such investors in
19) Pan
da (1980) has studied the role of stock exchanges in India before and after independence. The
study reveals that listed stocks covered four-fifths of the joint stock sector companies.
Investment in securities was no longer the monopoly of any particular class or of a small
group of people. It attracted the attention of a large number of 24 small and middle class
individuals. It was observed that a large proportion of savings went in the first instance into
20) The
financing choice (equity vs. debt) model (Hart and Moore, 1998) relies on asymmetries
information and believes that it is the result of the inability of investors to verify certain
actions or outcomes. Investors cannot earn higher returns without taking on greater risk and
the greater the risk, the greater the possibility of loss. (Harry M. Markowitz, 1952).
29
An empirical study on investors preference between equity and debt
21)
Patnaik and shah (2008) has analysed on the preferences of foreign and domestic institutional
investors in Indian stock markets. Foreign and domestic institutional investors both prefer
larger, widely dispersed firms and do not chase returns. However, we and evidence of strong
22) Shr
otriya (2003) conducted a survey on investor preferences in which he depicted the linkage of
investment with the factor so considered while making investment. He says There are various
factors and their linkage also. These factors help us how to ensure safety, liquidity, capital
Concluding Remarks:
Most of the studies related to the present topic have been conducted by various researchers at
national and international levels. But hardly, there exist studies which focus on study of
investment avenues of equity and debt at local level. Thus there exists a gap and the need for
30
An empirical study on investors preference between equity and debt
CHAPTER-3
RESEARCH METHODOLOGY:
Primary data :
Primary data collection involved a questionnaire (Annexure) with limited and focused
working and who have just completed their graduation. The questionnaire addressed areas
such as how much (approximately) of the income is saved, whether it is put into traditional
modes of savings or into the capital markets and also questions regarding how much do social
factors like friends and family influence their choices. Around 80percent of the contacted base
shared information sufficient for inclusion into the study sample. The focus was on students
working or having an earning source and studying at the same time.These students are from
different age groups, different income levels, different qualifications. (A copy of the
31
An empirical study on investors preference between equity and debt
Secondary Data:
2. Company website
4. Books
5. Customer database
Certain statistical tools used to express the data and disseminate information are used in this
project so as to give a simple and indepth analysis of all the aspects of the study of the topic.
Various tools used in this project are tables, charts and pie diagrams. As they help in simple
QUESTIONNAIRE
1) Na
me:-
2) Ge
3) Ag
e group:-
32
An empirical study on investors preference between equity and debt
35-50 Above 50
4) Occ
upation:-
Self-employed Salaried
5) An
nual income:-
6) Wh
7) Sou
rces of investment:-
8) Wh
33
An empirical study on investors preference between equity and debt
9) Wh
Liquidity Marketability
10) Yo
11) Fro
12) Ho
Daily Weekly
34
An empirical study on investors preference between equity and debt
Monthly Quarterly
Bi-annually Annually
13) Wh
Equity Debt
14) Wh
y, if equity?
Capital gains
Limited liability
Exercise control
15) Wh
y, if debt?
Safety
Fixed income
High returns
(Note: Dear Respondent, Your response to this questionnaire will be kept confidential. This
35
An empirical study on investors preference between equity and debt
CHAPTER-4
GENDER:-
Male 66 66
Female 34 34
AGE GROUP:-
18-22 42 42
22-27 22 22
27-35 12 12
35-50 16 16
36
An empirical study on investors preference between equity and debt
Above 50 8 8
OCCUPATION:-
Student 36 36
Businessmen 14 14
Self-employed 14 14
Salaried 36 36
ANNUAL INCOME:-
Below 300000
300000-600000 44 44
600000-1000000 26 26
Above 100000 16 16
14 14
Percentage of Savings :
Source of investment :
Savings 74%
Inherited Amount 2%
37
An empirical study on investors preference between equity and debt
pose
of Investment:
Factor Of Investment :
Safety 34%
Liquidity 16%
Marketability 8%
Equity Debt
56% 44%
38
An empirical study on investors preference between equity and debt
Safety 37%
39
An empirical study on investors preference between equity and debt
CHAPTER-5
ANALYSIS:
Percentage of savings
14%
42%
1-10%
10-20%
44%
20-30%
Nearly 44% of investors save 10-20% of their total income. 42% of people save about 1-10%
and only 14% of investors save 20-30% of income. Due to ever rising inflation, people are
40
An empirical study on investors preference between equity and debt
Sources of investment
Factors of investment
4%
20% 8%
16% 34% savings
2% safety
inherited amount
high return
14% 74% money from income
less risky
personal borrowings
liquidity
28%
marketability
There are
various sources
of investments as seen in figure. Majority of people invest from their savings. 20% of
investors invest from income earned whereas 4% of investors invest from borrowings. Only
Purpose of investment
30% 36%
wealth creation
tax savings
earn returns
22% 12%
future expenses
41
An empirical study on investors preference between equity and debt
21% weekly
monthly
quarterly
41% bi-annually
annually
Due to the busy life, many of the investors are not able to spend time on monitoring the
investments. Only 14% of the investors are monitoring their investments daily. 21% are
monitoring on weekly basis. 41% which are in majority monitor their investment monthly.
42
An empirical study on investors preference between equity and debt
Only 12% of investors monitor on quarterly basis. Many of them who have invested in safe
investment avenues do not bother about their investments and monitor their investments either
bi-annually or annually.Out of the total sample of investors, only 56% of the investors invest
in equity share market whereas 44% invest in debt market. This shows that majority of
Sources of information
8% 18%
brokers
more aware
about different
investment avenues. As seen in figure, 18% of investors take the help of the brokers. 32% of
the investors watch news channels to know about the ups and downs in capital markets. As use
of internet is growing rapidly, (42%) majority of people uses internet services. Only 8% of
investors gets knowledge about the performance of capital markets from their friends.
43
An empirical study on investors preference between equity and debt
11%
28%
Why debt is preferred? capital gains
61% limited liabilty
exercise control
36% 37%
safety
fixed income
The high returns
27%
investors who invest in equity were asked the reasons of investing in equity. So, as per the
survey, 61% of investors invest to earn capital gains and 28% of people invest in equity as the
liability of equity shareholders is limited up to the unpaid value of shares purchased by them.
44
An empirical study on investors preference between equity and debt
The investors preferring to invest in debt market were asked the reasons to do so. According to
the survey, it can be seen that 37% of investors invest in debt as it is safer as compared to
equity shares. Those who want to earn regular fixed income constitute only 27% of sample
investors. Nearly 36% of investors invest in debt market to earn higher returns.
INTERPERTATION:
1) No
wadays, people are more aware of different avenues. People like to invest in different capital
markets.
2) The
study reveals that male investors dominate the investment market in India.
3) Mo
st of the investors opt for two or more sources of information to make investment decisions.
4) Per
centage of income that they save depend on their annual income, more the income more
45
An empirical study on investors preference between equity and debt
5) Mo
6) Maj
7) Bus
inessmen expect higher return whereas salaried people invest to meet the future uncertainties.
8) The
9) Maj
ority of investors prefer to invest in equity share market as it gives higher returns.
10) Inv
estment in equity shares limits the liability of investors up to the unpaid value of shares
purchased by them.
11) Inv
estors prefer to invest in debt as it is safe and provides regular fixed income.
12) The
old age people who need regular income prefer to invest in debt market.
13) De
CHAPTER-6
46
An empirical study on investors preference between equity and debt
RECCOMENDATIONS:
supporting equity market because nowadays equity markets are increasing rapidly and it plays
people are showing their interest in equity market as it gives high return by bearing risk.
because it affects market conditions badly and new investors are reducing their interest in the
market.
reduced as more and more people fall in the trap. They buy more shares and if the share prices
47
An empirical study on investors preference between equity and debt
CONCLUSION:
Inv
estment is the sacrifice of certain present value for the uncertain future reward. In India,
numbers of investments avenues are available for the investors. The investor has to choose
proper Avenue among them, depending upon his specific need, risk preference and return
expected.
The
study concentrates on identifying investors preference towards equity and debt based on their
occupation, age etc. people with higher income prefer equity whereas people with lower
Her
debt. The major reason to choose equity is capital gains. Debt is selected as it seems to be
safer than equity. It is revealed that people preferring debts even though are salaried as well as
educated do not like to take any risk, they want to play safe. In todays scenario, SELECTON
48
An empirical study on investors preference between equity and debt
CHAPTER-7
BIBLIOGRAPHY
http
://www.moneycontrol.com/investor-education/mfexperts/debt-funds-or-equity-fundsright-
answer-may-be-both-1232548.html
http
://www.hsbc.co.in/1/2/personal/investments/new-invest/new-invest-factor-affecting
http
://www.slideshare.net/search/slideshow?searchfrom=header&q=equity+vs+debt
http
://shodh.inflibnet.ac.in/bitstream/123456789/1170/3/3%20literature%20review.pd
Ab
dulla Yameen (2001), Capital Market Development: Maldives Monetary Authority, pp. 8-
Del
Investors in the Capital Market, Acumen Marian Journal of Commerce and Management,
Sw
arup K. S. (2003), Measure for Improving Common Investor Confidence in Indian Primary
pdf, (19/08/2009)
Ley
la enturk Ozer, Azize Ergeneli and Mehmet Baha Karan (2004), Financial Risk Perception
49
An empirical study on investors preference between equity and debt
of Investors and Finance Specialists in the Beginning of the Stabilization Period of Turkey,
pp. 1-9.
QUESTIONNAIRE
16) Na
me:-
17) Ge
18) Ag
e group:-
35-50 Above 50
19) Occ
upation:-
Self-employed Salaried
20) An
nual income:-
50
An empirical study on investors preference between equity and debt
21) Wh
22) Sou
rces of investment:-
23) Wh
24) Wh
Liquidity Marketability
25) Yo
51
An empirical study on investors preference between equity and debt
26) Fro
27) Ho
Daily Weekly
Monthly Quarterly
Bi-annually Annually
28) Wh
Equity Debt
29) Wh
y, if equity?
Capital gains
Limited liability
Exercise control
52
An empirical study on investors preference between equity and debt
30) Wh
y, if debt?
Safety
Fixed income
High returns
(Note: Dear Respondent, Your response to this questionnaire will be kept confidential. This
53