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

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

ii

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

iii

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

iv

TABLE OF CONTENTS

DECLARATION

ii

CERTIFICATE

iii

ACKNOWLEDGEMENT

iv

TABLE OF CONTENTS

LIST OF TABLES

ix

LIST OF GRAPHS

ABSTRACT

xi

CHAPTER I
INTRODUCTION

CHAPTER II
REVIEW OF LITERATURE

2.1 INTRODUCTION

2.2 SUMMARY OF REVIEW

2.3 TABLE OF CONCLUSION

11

CHAPTER III
DESIGN AND METHOD OF STUDY

12

3.1 STATEMENT OF THE PROBLEM

13

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
vi

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

vii

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

4.11

34

Descriptive Anova Analysis Of Investment

Experience

4.12

36

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
ix

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

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.

xi

CHAPTER 1
INTRODUCTION

xii

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
xiii

policy if need arises. This has a significant effect on the investors sentiment (Alexander
Kurov 2009).

xiv

CHAPTER 2
REVIEW OF LITERATURE

xv

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

xvi

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
xvii

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, nonmetallic 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
xviii

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.
xix

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.

xx

xxi

xxii

CHAPTER 3
DESIGN AND METHOD OF STUDY

xxiii

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

xxiv

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 oneway 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.
xxv

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.

xxvi

CHAPTER 4
DATA ANALYSIS AND INTERPRETATION

xxvii

DEFINITION OF THE VARIABLES:

POLITICAL RISK:
The risk that any investment's returns could suffer as a result of political changes or nonstability 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

xxviii