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Arbaz Khan Roll# Mcm-f19-416
Arbaz Khan Roll# Mcm-f19-416
Arbaz Khan Roll# Mcm-f19-416
Submitted by
Arbaz Khan
MCM-F19-416
Project Supervisor
Sir Haider
Chapter#1:
1 Introduction
Investment is a pecuniary asset buy with the hope that it will give income in
future period of time and it will be sell at high price. Investment may be related
with various activities, the common aim of these activities to invest the savings for
specific period of time to increase the investor’s earnings. The investment come
from the assets which owner’s already have, previous savings and money
borrowed from various financial institutions or borrowed from family members.
The people consumption increasing day by day due to globalization so they invest
their savings to increase their income. There are two types’ real investments and
financial investments. Real investments include diffident type of assets like land
and building, plant and machinery and factories, etc. Financial investment include
agreements in paper or electronic agreements like common stock, bonds, bill of
exchange, promissory note, etc. The main purpose all these investments to earn
money considering various factors that affect the investment decision making.
Investor’s behavior change in the stock market due to various personal and
environmental factors when they make investment in different alternatives.
Various authors have conducted to find out behavioral factors that influence the
investment decision making in stock exchange. Investors invest his funds for get
high return in future time period. Individual rationally select the investment option
in the stock market (Von Neumann & Morgenstern, 1944).Sadiq & Ishaq, 2014)..
Now a days, behavior finance topic is an important part of investment decision
making since it impact the investors’ behavior towards the investment decision
making. The good understanding and knowledge of behavioral finance help the
individuals to choose best option from different alternatives. Mostly investors
unable to analyze investment return and risk characteristics of companies and they
make investment decision emotionally biased. Due to this reason, the investors
must understand the all factors that impact the investment decision making (Riaz,
Hunjra, & Azam, 2012). Various researchers and analysts have examined that how
risk associated with return in stock markets, recommend that high risk give high
return and low risk give low return from investments. Generally, people didn’t
consider the risk and return in investment decision making process. Investors select
option from various alternative emotionally.
Market knowledge means that awareness about the stock market of particular
companies stocks (Levine, 2007). The person who have awareness about the stock
market buy more stocks and buy assets which are more risky. In the stock market
community, various programs are arranged like seminars, conferences, workshops
and annual reports issued to increase the knowledge of the individuals (Guiso,
Sapienza,&Zingales, 2005). It is testify that the individuals who have more know
about a particular company invest more in stock of that company (Zhu, 2005).
In current scenario, whole over the world Muslim countries adopting the Islamic
laws and implement the Islamic laws in every moment of the life as they
implement when make investment decisions. Islam doesn’t means that obey the
Islamic laws for the will of Allah, merely Islam is a complete code of conduct for
every Muslim to implement in every aspect of life. Muslims always participated
to invest in different business and stock markets (Siddiqui, 1994). According to
Tahir and Brimble (2011) said that last few decade Islamic finance and banking
has been growing in whole of the Muslim world. Researcher found out that
religion factor influence the investors towards the investment decision making in
different alternatives.
The economic growth of whole world has been changed after the 9/11 incident at
world trade center on 11-09-2001 due to terrorism activities. Pakistan defend the
America after the incident against the terrorist groups, and facing various problems
due to terrorist attacks. Pakistan investors feel fear to make investment after the
incident and foreign investors also avoid to invest in Pakistan that has badly effect
the economic growth of the country. After the incident of world trade center the
terrorist activities increased which have the indirect influence on the behaviors of
investors to make investment in Pakistan. Due to terrorism activities Pakistan loss
the various people and assets of the country which influence the customer,
producer, and importantly investors. This reasons investors feel fear to invest in the
country and lose their confidence to make investment decisions (Shahbaz, Javed,
Dar, & Sattar, 2013). According to Fathi and Shahraki (2011) said that recently
there is greatly socio-political consequences influence investors behavior in stock
exchange and these events mainly occurs in the country like terrorism, political
instability and war that impact the stock market and investors behaviors.
Political risks influence the various businesses to create the problem in the whole
environment, such as corruption and bribery of political leaders are mutual. Social
risks in the society also effect which are occurs by the public which includes
fierceness, changing in society, civil wars, religious wars among the society,
strikes in the country, terrorism and any type of protest (Ting, 1988). All these
factors comes in the head of political instability that affect the investment decision
making in the country. Various foreign investors create political instability
appraisal and management systematic plans to overcome political risk and
equivocalness. The investors manage their strategies according to risks from
appropriate company. Companies manage their strategies according to difficult
political instability environment (Iankova & Katz, 2003).
Financial investment decisions are obligated and influenced by non-financial
factors. These factors include environmental factors and personality characteristics
of investors. All these factors affect the investment decisions by moderating way
and information of market play an important role. Investors set their mind
according to the information which they received from various sources about
investment options (Martinez, 2012).
This research will indicate how non-financial factors like market knowledge,
terrorism in the country, political instability and religious factor affect the
investment decisions making in Pakistan.
In order to gain the knowledge of this study, the individuals success towards
the investment decision making who invest in Pakistan stock exchange Pakistan.
So, the study has following objectives:
To identify and analyze the impact of market knowledge on investment
decision making in Pakistan Stock Exchange - Pakistan.
To identify and analyze the impact of religion on investment decision
making in Pakistan Stock Exchange - Pakistan.
To identify and analyze the impact of terrorism on investment decision
making in Pakistan Stock Exchange - Pakistan.
To identify and analyze the impact of political instability on investment
decision making in Pakistan Stock Exchange - Pakistan.
Investment decision making now a day’s very critical factor for financial
investment in future. There is huge financial loss and high cost due to wrong
investment decisions since various investor don’t have market knowledge and
basic concept of economic theories that are required to make investment decisions
(Sultana & Pardhasaradhi, 2012). The researcher examines that market information
for individual investors is very important that help individual to make investment
decisions making. The results of study also shows that how much demand of the
market information about the investment security and quality, and company
investing activities. Individuals should have market knowledge that impact their
opinions on investment decisions. The research indicate that many investor don’t
have enough knowledge of market and key concept of financials to make good
investment decisions (Alleyne & Broome, 2010).
According to Ghufran, Awan and Durrani examines that the investors have higher
level of cocksureness and beliefs on themselves to good selection ability of stock
and knowledge from market. Rashid et al. (2009) found in their study that the
efficiency of company, easy and quick transactions, industry information, inflation
rate, transaction cost, and quality of information gather from various sources and
prior market knowledge of investments influence the investment decisions making
of individuals.
The individual investment is affected due to low level of knowledge which the
investor obtained about the different investment alternatives, knowledge of risk
and return of particular company which the investor want to invest, company
performance past few years and techniques that are used to manage the portfolio
(Lodhi, 2014). Another study indicate that knowledge of investor about the
financial investment and financial plans and basic knowledge that how to make
investment decision. The investors feel knowledge about the market is most
important determinant before investment decision making. The people also
indicate that it not government duty to offer various investment schemes but the
government should give proper knowledge before selecting the best investment
option (Kabra, et al., 2010). As Sam and Salami (2013) identified that the
participants of study have less knowledge about the stock market procedures and
stock market knowledge has significant and directly positive influence the market
contributors towards the investment decision.
The investors who have or have not market knowledge are constantly check the
market activities cleverly and know their investment goals and objectives. Due to
increase in fund raising services in the whole universe, it is very important to
understand that how investor make investment decision and select the different
investment alternatives. Stock market is best place to maximize the wealth in short
period of time in financial tools (Khaparde & Bhute, 2014). Every investor in
market understand the different alternatives and select on the basis of a certain
define criteria. All the investors in stock market have different perceptions
regarding the different investment alternatives, risk and return. Investors have
different perception due to different demographic characteristics such as
investment goals, age, gender, experience in stock market, income and the needs of
the investors.
Investment and portfolio management rules suggest that potential investors
should have knowledge of financial market, know all the activities of the market
to choose the best stock which give more return in short and long period of time
(Hamada, Sherris, & Hoek, 2006). Various studies have been conducted about
the awareness of stock market and conclude that knowledge of stocks, mutual
funds and investing alternatives in monetary tools have a positive relation with
education of stock markets (Guiso & Japelli, 2004). According to Bernheim,
Garrett, and Maki (2001) and Bemheim and Garrett (2003) the individual who
got financial knowledge in school level or in his practical life have more savings.
The individual who has more savings, he has more investment portfolio. If other
thing remaining the same, knowledge about stock market procedures leads to
more investment in financial assets.
2.1.3 Religion
2.1.4 Terrorism
Singh (2011) find in his study that terrorism has negative significant
influence on the long term investment but on the short term investment has
insignificant influence. The people who are living in bordering area rich farmers
investments are more effected than poor farmers. The investors avoid to invest due
to financial loss from terrorist attacks. The investors who are facing problem of
terrorist attacks, they expect to leave the country and prefer to invest another
country.
The terrorist violation there is negative influence on the country economy
especially on foreign direct investments flows. The researcher argue that
significant influence of terrorism activities on foreign direct investments in
Pakistan. Due to this influence certain industries largely impacted, financial
business industry, construction industry, trade, communication industry and
personal service of the individuals. Other various sectors like power, petroleum,
and oil and gas have negative return from investments and they have insignificant
impact. The firm who gain higher return from investments since those firms take
high risks (Haider & Anwar, 2014).
Terrorism and Foreign Direct Investment have negative relationship in Pakistan.
Due to terrorist activities the investors avoid to invest and investors decrease their
confidence level which major reason to decrease in foreign direct investment in
Pakistan (Shahbaz, Javed, Dar & Sattar, 2012). Terrorist attacks influence the
Tehran Stock Exchange prices index. After analysis researcher results show that
terrorist activities has significant influence on Tehran Stock Exchange prices.
Finding of the research also identify that another factors impact the stock exchange
prices are political factor that is identifiable and controllable (Fathi & Shahraki,
2011).
Terrorism currently overall world phenomenon that every country hunting from
time to time, however we need to develop the understanding how terrorism effect
the stock market. The stock market of an country play an important role for the
development of economy of the country that provide the facilities to individuals to
raise fund, trade, commerce, economic growth and investment in different
alternatives. The researcher indicate his study that there is significant negative
impact on stock market prices. Due to this reason investor avoid to make
investment decisions (Wesley & Lumumba, 2012).
Terrorism is characterized by deliberate purpose and some degree of planning to
violate by individual persons or groups to attain political or social aims. The
researcher find out the relationship between foreign direct investment and
terrorism in the country. The study shows that all kinds of terrorism demoralize the
foreign direct investment. And there is negative impact on the international and
national terrorism on investment (Bandyopadhyay, sandler,& Younas, 2011).
The stock exchange market is very important for growth of economy and plays a
vital role for the development of country economy. Stock market provides the
economy investments, funds collection, commerce and economic increment and
evolution. Its apply privatisation curriculum which play an important role for the
growth of national economies (Lee, 1998). Terrorism activities negatively
influence the economic trends and determinants like investments, FDI and
currency exchange and also badly effect the investor’s investment decisions
making in stock market while purchasing stocks and affects the companies’ profits
(Drakos, 2004). According to Chen and Siems (2004) investors’ fears and future
expectations effect the stocks prices and share value due to terrorist attacks in the
country. Terrorist incident and not anticipated calamity have major effect on the
stock exchange market. When investors received terrorist alerts of terrorism
activity then the investors avoid to invest and investors buy and sell stocks are
effected. Due to globalization advanced technology the stock prices effect quickly
when terrorist alerts received. Socio-political incidents like terrorism, unforeseen
events and instability in country interrupt the stream of financial transaction among
countries and influence the income and share prices of the companies (Wesley &
Lumuba, 2012).
Feng (2001) indicates that whether democracy and other political institutions
are significant impact on investment. The researcher identify three factors like
political instability, policy uncertainty and political freedom. Political freedom
boost up investment in different options, specially promoting human capital
creation, political instability negatively impact the investment. Last, policy
uncertain has adverse influence on investment. These factors analyze domestically
and internationally tested.
The political risk always create issues over the period of time, due to change in
business climate change the scenario, favorable level of these issues create a great
opportunities for the investors. The researcher to find out the relationship among
the political risk, investment and business climate. The business climate is not
significant impact on foreign direct investment inflows. When the business climate
according to favorable business situations has positive significant influence the
foreign direct investment inflows. The results shows that investment decision
making depend on good economic policies, sound governance and political
stability (Schneider & Matei, 2010).
There is negative impact of political instability on investment. But the sensibility
of investment is vary time to time political instability. The researcher examines
that there is differences exist in economic execution among different countries can
prevarication in very short period political determinants in which policy makers
have direct impact as in exponent of democracy (Fielding, 2000).
Political instability consequences striking influence on stock exchange market
growth and development. Currently, In Pakistan political instability risk and its
results have major impact on investment due war on terror (Masood & Sergi,
2008). Political risk plays a significant role of the business surroundings for
various companies which have global functioning, all the agreement are not
possible to compel at multinational level (Tomz & Wright, 2010).
Chapter#6:
References