RESEARCH practices of retail investors in equity markets,

RESEARCH PAPER ON FINANCE AND CAPITAL MARKETMr.Akshay Kumar, Mr.Rohan Chauhan, Mr.Manish DubeyStudent: University Of Delhi


ABSTRACTFinance,  specifically, 
in corporate  terms,  the system 
of  internal  control 
regarding  the procurement  and  effective  utilization 
of funds  post  identification  of 
feasible investment 
opportunities  pertaining  to 
profitability  promotion  that 
adequately compensate  for  the 
cost  and  risk 
borne  by  the 
business  undertaking/enterprise.
Capital market, in India, has  been  significantly 
contributing  towards  the facilitation  of 
moderate  and  long 
term  finance  provision 
from  the surplus  units 
to  the  deficit 
units.  A  Developing 
economy  like  India needs  
a  growing  amount 
of  investor  savings 
to  flow  to 
corporate enterprises.  The  level 
of  equity  market 
participation  of  the 
retail  investors  has 
been  increasing  over 
the  past  few 
years  that  evoked the 
need  of  studying 
the  socio-economic  profile 
of  the  retail  
investors,  factors  influencing 
the  investment  behaviour 
of  retail investors,  examining 
the  trading  practices 
of  retail  investors 
in equity  markets,   factors 
affecting  the  risk 
assumption  abilities  alongside 
the  problems  faced 
by  retail  investors. 
Historical   evidences  based 
upon  secondary  facts 
support  the  undertaken scope  of 
the  study.  A 
comprehensive  study
involving  macro-economic  parameters 
influencing  the  primary 
and  secondary  securities 
market  trends,  corporate 
fundamental factors, 
technical  indicators  and 
investor’s  behaviour  patterns 
were  carried  out 
to  understand  the 
performance  of  Indian 
capital  market  in 
recent  times.  The 
research  elicits  the 
opinion  of  the 
retail  investors  on 
the  policy  making 
of  capital  market 
thereby  suggesting  certain 
measures  to the  policy 
makers  for  the 
protection and  promotion  of 
market, Stock Exchange, Primary and Secondary Markets, Capital markets.INTRODUCTIONTracing the origin of finance, there is
substantiation to demonstrate that it is as old as human life on earth.
Originally a French word, English speaking clique used to mean it as”the money
administration” and in the contemporary world it is considered as pivotal
economics’ limb. According to academicians, “finance is the procurement and
efficacious exertion of funds dealing with the profits requisitely compensating
for the associated cost and peril borne by the business houses/entities”. Finance,
the science of funds management and the actual process of taking possession of
sufficient quantum of required money circumscribe the oversight creation and
study of money, banking credit, investment options, assets and liabilities that
constitute the financial systems. Basic conceptuality of finance comes from one
of the fundamental theories i.e. time value of money, affecting the
individuals, businesses and government entities’ operating funding needs.
Finance field is often segregated into three main sub-categories: personal
finance, corporate finance and government finance. Creation of the tangible
assets with the help of funds, performing intraday functional business
activities and obtaining financial securities are all adherences of monetary
resources at deferent times with a presupposition of economic returns in the
futuristic course of time. Maintenance of the internal controls in the form of
rules, regulations and guidelines framed at the inception stage of the
organisation often subject to alterations basically depend upon businesses
requirement with better futuristic decisions involving quantitative analysis of
the organisation thereby serving as a barometer of sectorial growth. The
appointment of pertinent financial advisors as a part of the finance raising
process to deliver the objectives and goals of the company have an access to a
network of contacts including financial institutions, private equity investors,
venture capitalists and debt financing investors. LITERATURE
REVIEWInvestors’ rationality must be
prioritised over and above the emotionality while arriving at the investment
decisions by taking into consideration the thorough judgements and assessments of
the investment options (Brabazon.T, 2000).
Investors often wait for a steep hike in the share price until it outweighs the
purchasing price to acquire some capital gain. Successful investors’ decisions
are dependent more on the crave to avoid that awful feeling associated with
admitting mistake and overcome these adverse psychological influences (Iyer B and Baskar RK, 2002). Demographic
profile structure of the investors also affects the emotional stability while
taking into account the various elements of the investment avenues (Shanmugasundaram V and Balakrishnan V,
METHODOLOGYThe research paper is an attempt of
exploratory research based on the secondary data sourced from journals,
internet, articles, literatures, newspapers, previous research papers. The
research design employed for the study is of descriptive nature. Focusing on
the determined objectives strictly, the research design was adopted to have
greater precision and in-depth analysis of the research study. Available
secondary data was extensively used for the study. OBJECTIVES OF
THE STUDYü  To trace the retail
investor’s participation in the equity capital market over the past few years.ü  To analyse the
socio-economic profile of the retail investors, investors buying behaviour and investment
or trading practices.ü  To assess the
fundamental and technical factors for understanding the recent performance of
the Indian capital market.ü  The hurdles
commonly faced by small investors in the Indian capital market prior to
arriving at an investment decision.ü  To recommend for
the enhanced participation of the retail investors towards the contribution in
strengthening the financial deepening process in India.ü  To highlight the
steps taken by the government to strengthen the retail investor’s capital base. FINANCIAL MARKET Financial market refers to the arrangement,
where the trading of securities including the equities, bonds, currencies and derivatives
occur based upon the free play of the market forces. Some large financial
markets including the New York stock exchange, NASDAQ, Tokyo stock exchange,
London stock exchange and the forex markets trade trillions of dollars of
securities on an intra-day basis. The presence of financial instability
differentiates the actual and the intrinsic fair price of the securities. The
prices are heavily reliant on the information symmetry in the market and
transparency by the issuing company to ensure methodical and expropriate setting
of the prices in the market. A financial market consists of two major segments:
a) Money market and b) Capital Market. MONEY MARKETMoney market is a market for short-term
funds, which deals in financial assets whose period of maturity is up to one
year. The constituents of the Indian money market are RBI (the apex monetary
authority), commercial banks, co-operative banks and other specialised
financial institutions like (NBFCs) Non-Banking Financial corporations, LICs,
UDIs etc., functioning in the Indian money market.Money Market Instruments: Call Money,
Treasury bill, Commercial Paper, Certificate Of Deposit, Repurchase agreement,
federal agency notes, bankers’ acceptances etc. CAPITAL MARKETCapital market is an institutional
arrangement of arraying medium and long-term funds which provides prerequisites
for marketing and trading of securities. It constitutes all long-term
borrowings from depository as well as non-depository financial institutions,
borrowings from external markets and raising of capital by issuing various
securities such as stocks, debentures, bonds etc. It is comprised of two
different segments namely primary and secondary market. The primary market
deals with fresh securities and therefore, also known as new issue market;
whereas the secondary market provides a mechanism for purchase and sale of
existing securities and is often termed as stock market or stock exchange. PRIMARY MARKETThe arrangement which facilitates the
procurement of long-term funds by companies via making fresh issue of shares
and debentures which is usually done through private placement to financial
institutions or by making public issue. The well-established lawful stratagem
involve a number of intermediaries such as underwriters, brokers, etc. which
form an integral part of the primary market  e.g. Public sector undertakings (PSUs) such as
ONGC, GAIL, NTPC and the private sector companies like TCS, jet-airways and so
on. Recently, companies like HDFC standard life ins, khadim India, Mahindra
logistics, SBI life ins have issued IPOs in the market to raise fresh capital. SECONDARY MARKETStock exchanges/stock markets across the
entire globe constituting the well-versed and booming financial markets
enabling the financial depth/Deepening to ensure the trading of deferent
matured security instruments facilitate the mobilising of surplus funds from
capital holders to deficit units. In the innovative era, most developed
economies, the growth pattern of which depends upon the supply leading
condition exaggerate the economic growth process resulting in a fast paced financial
deepening. While in contrast, the developing or less developed economies depending
upon the demand following conditions basically follow the pattern of
strengthening the financial markets and trading in secondary market to result
in a stabilised and promoted economic growth. Required regulatory norms,
stringent and transparent practices, information symmetry, globalised
interconnections have all created a competent global environment. New York
stock exchange, NASDAQ, London stock exchange, Tokyo stock exchange are the
leading stock market indices evoked the competitiveness through technological
advancements and easier compliance trading thereby generating more liquidity
and velocity of securities dealing. BSE SENSEX, NSE (Nifty 50) in India, serve
as the economic barometer and quantitative index to signify the prosperous
growth in the external market to support the social external infrastructure. FACTORS
advent and growth of stock exchanges (BSE) 1875, (NSE) 1992. ·        
of non-banking financial institutions (Mutual Funds, Venture Capital Funds, Index
Funds, hedge funds, Pension funds etc.) ·        
and faster Compliance structure and magnification in merchant banking services.
role of credit rating agencies (ICRA, CRISIL, CARE, Fitch India·        
corporate governance norms, intensified transparency, stringent regulations,
evolution of newer security instruments, feasible investment avenues,
enlargement of the interest protection policies for investors. ·        
up of National Securities Clearing Corporation (NSCC).    CAPITAL MARKET
FUNDS VS DEPOSITORY INSTITUTIONS LOANSIntermediation in the capital market
occurs through the interchange of spacious assemblage of instruments including
common and preferred equities, convertible bonds, corporate bonds,
mortgage-backed securities and other asset-backed securities (home-equity
loans, credit-card receivables, auto loan, student loan). Intermediation in the
depository institutions differs in three important respects. First, the
investor does not have a claim on the elementary inheritor of the funds. Second,
the price of assert does not typically oscillate in response to the shifts in
market forces (supply and demand). Third, the investor can not normally sell
this claim to a third party. An important difference is that with a disciplined
banking loan, the lending is non-securitized. Another difference is that
granting from banks and similar institutions is more heavily regulated than
capital market lending. Furthermore, banks’ primary depositors and shareholders
tend to be more risk averse than capital market investors.  ROLE OF RETAIL
INVESTORS IN THE CAPITAL MARKETOther than the domestic and foreign
institutional investors, the role played by the small retail traders has been
paramount in the capital market. But, the dishonourable fact is that the
household investors park their savings significantly lower in capital market,
perhaps because of the higher risk probability of getting indulged in the
market scams, manipulations, frauds and also on account of the higher
unpredictability. Any analysis or interpretation about the securities market
will be incomplete without the mentioning of investors and stakeholders in
particular, the retail investors. It is advisable for the retail investors to
consider the risk undertaken through thorough assessment and in an abundantly
cautious manner. As retail investors look for long matured investments in
converse to the FIIs, FFIs, QIBs and HINs playing for short-term capital gains,
the government and its various concerned agencies must look after the interests
of the retail investors for proliferating the economic status. There is growing
concern about the welfare and probity of capital market on the international
platform so as to make the securities markets shielded, crystalline and
deprived of frauds, misappropriations, malfunctioning and corporate scams. Currently,
Indian securities market is one of the most vigorous and dynamic securities
market in the world with updated state of technology, shortest trading settlement
cycle and paperless proceedings with screen based trading system, better
corporate governance norms and quicker dissemination to maintain information
symmetry. Although, securities price manipulations, magnified fluctuations,
repeated corporate rackets, abortive corporate governance norms etc. have been
the main reasons for keeping the retail investors away from the securities
initiation of online trading which led to the extensive popularisation of the
NSE in the brokers’ fraternity. The eradication of fixed charges in the form of
commissions has augmented competition among the brokers, the creation of asset
backed securities, deduced quantum of equity required for working capital or
current operations and further trimming in the financing cost. The scripless
trading enlargement and book entry settlement with reduced back office
paperwork has led to curtail the transaction cost. Capital market insurance
solutions offer a propitious means of funding protection for even the largest
potential catastrophic losses. Unit linked insurance plans (ULIP) – the capital
market linked insurance products are considered to be the new best-selling
instruments in the insurance market. The conducting of online examinations and
the provision of award certification by NSE, under its programmes of NSE’s
certification in financial markets (NCFM) has been considered to be one of the
most encouraging innovative steps. Currently, certifications are available in
multiple modules covering different sectors of financial and capital markets.
The introduction of committees for IPO issues regarding the mismanagement of
funds has led to create an element of certainty and uniformity among the
investing communities. The facilitation of the process of demutualisation and
corporatisation of stock exchanges and launching of the electronic order
matching system for trading in gilt edged securities on its negotiated trading
system allowed capital markets to boom. Allowing Mutual Funds to levitate Gold
Exchange Traded Fund Schemes which have permitted to invest primarily in gold
and gold related instruments and the issuance of guidelines for private
placement of debt by listed companies. CHALLENGES IN
THE DEVELOPMENT OF CAPITAL MARKETSThe proper functioning of capital
markets resides upon the several preconditions classified into 3 groups: sound
descriptive macro-economic policy, sturdy institutional and legal setting and a
properly functioning financial infrastructure. Until these preconditions are
complied with, the government efforts to thrive local capital markets are bound
to fail, resulting in shallow markets and delude investors and therefore
generally advisable to sequence financial sector reforms such that these
conditions are sufficiently in place before local capital markets are
established. BENEFITS TO THE
RETAIL INVESTORS FROM THE CAPITAL MARKETSWisely taken investment decisions
putting into consideration the viability of the company, fundamental analysis, past
financial performance, management structure, business environment, market
competitiveness and other macro environment factors turns out to be desirable
and fruitful.Capital
It necessitates the difference between the purchasing and selling price of a
share of a company which signify the capital gain.Dividend Income:
sum of money agreed upon by the directors of a company to be distributed
amongst the shareholders on proportional basis from the company’s profit.Issuances of
Bonus shares:
Incentive, entailing a shareholder to acquire additional shares from the
company instead of a dividend without necessarily paying.Rights Issuances: Investors are
opportune to be equipped with rights shares in proportion to their old
shareholding pattern at a price lower than the market prevailing price. Participation in
the Management: Investors
have the right to participate in the company’s decision making process thereby
exercising their voting rights in AGMs. Banking
collateral and social security benefits: Share certificates serve as collateral
to obtain bank loans for individual use or business development. Buying of
stocks could be used as individual preparation towards personal pension plan,
therefore having an opportunity to considerably invest in the stock market
during earlier age. CHALLENGES FACED
Capital: The
small investor with less capital invested in the stock market trades for
himself, not for a company. Although, small investors generally invest in
stocks, mutual funds and index funds, investment choices available like
options, futures, forwards and swaps are usually too complicated and expensive
for small investors.Cost: Small investors’
lower degree of negotiating power allow brokerage firms too charge a higher
percentage of management fees on small accounts thereby meaning a higher return
for the year to break even. Funds, especially index funds, have very low annual
fees.Diversification: As a small
investor, it’s harder to build own diversified portfolio due to limitation of
available resource to spread across various industries or companies.Information: One
other disadvantage from the small investor’s point of view is the information
Professional investors have research staffs that are constantly providing them
with up to date information. As a small investor, it can feel one step behind
our competitors. However, the internet has made a big dent in this disadvantage. FINDINGSAs per the analysts, the fixed income
generating securities and the volume of trading transactions have an inverse
relationship. Equity securities and the debt instruments do possess a higher
degree of substitution. In fixed or partly negotiable fee model environment,
reductions in brokerage fees are strongly positively correlated with increase
in trading activity. Reduced trading fees in a market with a non-negotiable fee
model has a positive influence levels of trading activity increase in
cost-to-trade are associated with declines in depth of retail activity as there
is a significant negative relationship between increase in clearing fee and
levels of trading activity. Moving from a fixed to a negotiable or even partly
negotiable fee model has the effect of reducing cost-to-trade. SUGGESTIONSThe outcome of this research leads to
the suggestion that the regulators must include the role of behavioural
dimensions in its awareness campaigns due to the criticality of even the
qualitative factors in investment decisions. This research also recommends
apposite measures to address the genuine uneasiness of the retail investors.
There is need to create financial literacy and awareness, expanding the number
of issues, providing diverse investment options, training and increasing the
reach of intermediaries, enhancing investor protection measures, simplified norms
and cost-effective services. CONCLUSIONThe small investor’s attitude towards
debt instruments needs change, and that this will be impossible without a
radical overhaul of the small savings schemes in India. There seems to be
widespread misconception about pooled investment vehicles that needs to be
removed as investments such as mutual funds can really fulfil the entire range
of risk appetite for small investors while increasing the depth and width of
primary and secondary debt capital markets. Finally some suggestions regarding
market innovations in terms of a derivative product (Counter Party Risk
Protection Security) that may help allay small investors concerns while
transacting in corporate securities and help fuel growth in these markets. BIBLIOGRAPHY ·        
Shanmugasundaram, V., Investor Behaviour towards Various Capital Market
Information, Annamalai University, India.··        

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