UNIVERSITY OF MUMBAI

PROJECT ON

A STUDY OF CHALLENGES FACED BY INVESTORS IN

INVESTING IN STOCK MARKETS

(RESEARCH METHODOLOGY)

MASTER OF COMMERCE (BANKING AND FINANCE)

SEMESTER III

2013-14

In Partial Fulfillment of the Requirement under Semester Based Credit

and Grading System for Post Graduates (PG)

Programme under Faculty of Commerce

SUBMITTED BY

PRATIK JAIN

ROLL NO: 46

PROJECT GUIDE

Dr (MS). RAJESHWARY

K.P.B HINDUJA COLLEGE OF COMMERCE

315, NEW CHARNI ROAD, MUMBAI-400 004

M.Com (BANKING & FINANCE)

3rd SEMESTER

A STUDY OF CHALLENGES FACED BY INVESTORS IN

INVESTING IN STOCK MARKETS

SUBMITTED BY

PRATIK JAIN

ROLL NO: 46

2013-14

CERTIFICATE

This is to certify that Mr. Pratik Jain of M.Com. Banking and Finance Semester-

3rd

[2013-14] has successfully completed the Project on “A STUDY OF

CHALLENGES FACED BY INVESTORS IN INVESTING IN STOCK MARKETS”under

the guidance of Ms Rajeshwary G

Project Guide ________________

Course Coordinator ________________

Internal Examiner ________________

External Examiner ________________

Principal ________________

Date:

Place: MUMBAI

DECLARATION

I Mr. Pratik Jain student of M.Com (Banking and Finance), 3rd

semester

(2013-2014), hereby declare that I have completed the project on “A STUDY OF

CHALLENGES FACED BY INVESTORS IN INVESTING IN STOCK MARKETS”

The information submitted is true and original copy to the best of my knowledge.

Pratik Jain

(Signature)

ACKNOWLEDGEMENTS

I feel the pleasure to have an opportunity to express my deep and sincere feelings

of gratitude towards all the personalities who have helped me to convert my

dreams into the reality.

Sincere thanks to my Project Mentor Ms. Rajeshwary G for her guidance and support

at every step while completing this project and providing me the accurate and detailed

information to complete this report as part of my curriculum. Without her continuous

help and enthusiasm the project would not have been materialized in the present form.

I also extent my sincere thanks to our Course Co-ordinator Dr. (Ms.) Rajeshwary

G. for her much required coordination and encouragement which helped me in

coming up with successful completion of this project.

I pay my sincere regards to my parents and friends who always encouraged and

helped me in the preparation of this project.

CHAPTER 1

INTRODUCTION

A financial market is a market in which people and entities can trade financial securities,

commodities, and other fungible items of value at low transaction costs and at prices that reflect

supply and demand. Securities include stocks and bonds, and commodities include precious

metals or agricultural goods.

There are both general markets (where many commodities are traded) and specialized markets

(where only one commodity is traded). Markets work by placing many interested buyers and

sellers, including households, firms, and government agencies, in one "place", thus making it

easier for them to find each other. An economy which relies primarily on interactions between

buyers and sellers to allocate resources is known as a market economy in contrast either to a

command economy or to a non-market economy such as a gift economy.

In finance, financial markets facilitate:

The raising of capital (in the capital markets)

The transfer of risk (in the derivatives markets)

Price discovery

Global transactions with integration of financial markets

The transfer of liquidity (in the money markets)

International trade (in the currency markets)

– And are used to match those who want capital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the capital. These

receipts are securities which may be freely bought or sold. In return for lending money to the

borrower, the lender will expect some compensation in the form of interest or dividends. This

return on investment is a necessary part of markets to ensure that funds are supplied to them.

Definition –

In economics, typically, the term market means the aggregate of possible buyers and sellers of a

certain good or service and the transactions between them.

The term "market" is sometimes used for what are more strictly exchanges, organizations that

facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This

may be a physical location (like the NYSE, BSE, NSE) or an electronic system (like NASDAQ).

Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are

outside an exchange, while any two companies or people, for whatever reason, may agree to sell

stock from the one to the other without using an exchange.

Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a

stock exchange, and people are building electronic systems for these as well, similar to stock

exchanges.

Types of financial markets

Within the financial sector, the term "financial markets" is often used to refer just to the markets

that are used to raise finance: for long term finance, the Capital markets; for short term finance,

the Money markets. Another common use of the term is as a catchall for all the markets in the

financial sector, as per examples in the breakdown below.

Capital markets which consist of:

o Stock markets, which provide financing through the issuance of shares or

common stock, and enable the subsequent trading thereof.

o Bond markets, which provide financing through the issuance of bonds, and enable

the subsequent trading thereof.

Commodity markets, which facilitate the trading of commodities.

Money markets, which provide short term debt financing and investment.

Derivatives markets, which provide instruments for the management of financial risk.

Futures markets, which provide standardized forward contracts for trading products at

some future date; see also forward market.

Insurance markets, which facilitate the redistribution of various risks.

Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets may also be divided into primary markets and secondary markets. Newly

formed (issued) securities are bought or sold in primary markets, such as during initial public

offerings. Secondary markets allow investors to buy and sell existing securities. The transactions

in primary markets exist between issuers and investors, while in secondary market transactions

exist among investors.

Liquidity is a crucial aspect of securities that are traded in secondary markets. Liquidity refers to

the ease with which a security can be sold without a loss of value. Securities with an active

secondary market mean that there are many buyers and sellers at a given point in time. Investors

benefit from liquid securities because they can sell their assets whenever they want; an illiquid

security may force the seller to get rid of their asset at a large discount.

HISTORY

BOMBAY STOCK EXCHANGE:

The Bombay Stock Exchange is the oldest exchange in India. It traces its history to 1855, when

four Gujarati and one Parsi stockbroker would gather under banyan trees in front of Mumbai's

Town Hall. The location of these meetings changed many times, as the number of brokers

constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an

official organization known as 'The Native Share & Stock Brokers Association'.

In 1958, the BSE became the first stock exchange to be recognized by the Indian Government

under the Securities Contracts Regulation Act. In 1980 the exchange moved to the Phiroze

Jeejeebhoy Towers at Dalal Street, Fort area. In 1986 it developed the BSE SENSEX index,

giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used

this index to open its derivatives market, trading SENSEX futures contracts. The development of

SENSEX options along with equity derivatives followed in 2001 and 2002, expanding the BSE's

trading platform.

Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched to an

electronic trading system in 1995. It took the exchange only fifty days to make this transition.

This automated, screen-based trading platform called BSE On-line trading (BOLT) had a

capacity of 8 million orders per day. The BSE has also introduced the world's first centralized

exchange-based internet trading system, BSEWEBx.co.in to enable investors anywhere in the

world to trade on the BSE platform.

National Stock Exchange:

The National Stock Exchange of India was set up in 1993, at a time when PV Narasimha Rao

was the Prime Minister of India and Dr. Manmohan Singh was the finance minister. It was set up

to bring in transparency in the markets. Promoted by leading financial institutions essentially led

by IDBI at the behest of the Government of India, it was incorporated in November 1992 as a

tax-paying company. In April 1993, it was recognized as a stock exchange under the Securities

Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market

(WDM) segment in June 1994. The Capital market (Equities) segment of the NSE commenced

operations in November 1994, while operations in the Derivatives segment commenced in June

2000.

The National Stock Exchange (NSE) changed the way the Indian markets functioned, in the early

nineties, by replacing floor based trading with nationwide screen based electronic trading, which

took trading to the doorstep of the investor. The exchange was mainly set up to bring in

transparency in the markets. Instead of trading membership being confined to a group of brokers,

NSE ensured that anyone who was qualified, experienced and met minimum financial

requirements was allowed to trade. In this context, NSE was far ahead of its times, when it

separated ownership and management in the exchange under SEBI's supervision. The price

information which could earlier be accessed only by a handful of people could now be seen by a

client in a remote location with the same ease. The paper based settlement was replaced by

electronic depository based accounts and settlement of trades was always done on time. One of

the most critical changes was that a robust risk management system was set in place, so that

settlement guarantees could protect investors against broker defaults.

NASDAQ:

NASDAQ was founded in 1971 by the National Association of Securities Dealers (NASD), who

divested themselves of it in a series of sales in 2000 and 2001. It is owned and operated by the

NASDAQ OMX Group, the stock of which was listed on its own stock exchange beginning July

2, 2002, under the ticker symbol NDAQ. It is regulated by the Financial Industry Regulatory

Authority (FINRA), the successor to the NASD.

When the NASDAQ stock exchange began trading on February 8, 1971, it was the world's first

electronic stock market. At first, it was merely a computer bulletin board system and did not

actually connect buyers and sellers. The NASDAQ helped lower the spread (the difference

between the bid price and the ask price of the stock) but somewhat paradoxically was unpopular

among brokerages because they made much of their money on the spread.

NASDAQ was the successor to the over-the-counter (OTC) system of trading. As late as 1987,

the NASDAQ exchange was still commonly referred to as the OTC in media and also in the

monthly Stock Guides issued by Standard & Poor's Corporation.

Over the years, NASDAQ became more of a stock market by adding trade and volume reporting

and automated trading systems. NASDAQ was also the first stock market in the United States to

start trading online, highlighting NASDAQ-traded companies (usually in technology) and

closing with the declaration that NASDAQ is "the stock market for the next hundred years." Its

main index is the NASDAQ Composite, which has been published since its inception. However,

its exchange-traded fund tracks the large-cap NASDAQ-100 index, which was introduced in

1985 alongside the NASDAQ 100 Financial Index.

Until 1987, most trading occurred via the telephone, but during the October 1987 stock market

crash, market makers often didn't answer their phones. To counteract this, the Small Order

Execution System (SOES) was established, which provides an electronic method for dealers to

enter their trades. NASDAQ requires market makers to honor trades over SOES.

In 1992, it joined with the London Stock Exchange to form the first intercontinental linkage of

securities markets. NASD spun off NASDAQ in 2000 to form a publicly traded company, the

NASDAQ Stock Market, Inc.

In 2006 NASDAQ changed from stock market to licensed national exchange.

On November 8, 2007, NASDAQ bought the Philadelphia Stock Exchange (PHLX) for US$652

million. PHLX is the oldest stock exchange in America—having been in operation since 1790.

To qualify for listing on the exchange, a company must be registered with the United States

Securities and Exchange Commission (SEC), have at least three market makers (financial firms

that act as brokers or dealers for specific securities) and meet minimum requirements for assets,

capital, public shares, and shareholders.

In February 2011, in the wake of an announced merger of NYSE Euronext with Deutsche Börse,

speculation developed that Nasdaq and Intercontinental Exchange (ICE) could mount a counter-

bid of their own for NYSE. Nasdaq could be looking to acquire the American exchange's cash

equities business, ICE the derivatives business. As of the time of the speculation, "NYSE

Euronext’s market value was $9.75 billion. Nasdaq was valued at $5.78 billion, while ICE was

valued at $9.45 billion." Late in the month, Nasdaq was reported to be considering asking either

ICE or the Chicago Merc to join in what would probably have to be, if it proceeded, an $11–12

billion counterbid.

The European Association of Securities Dealers Automatic Quotation System (EASDAQ) was

founded originally as a European equivalent to NASDAQ. It was purchased by NASDAQ in

2001 and became NASDAQ Europe, but operations were shut down as a result of the burst of the

dot-com bubble. In 2007, NASDAQ Europe was revived as Equiduct and is currently operating

under Börse Berlin.

In 2013, NASDAQ was approached by private equity firm Carlyle Group about taking the

exchange operator private, but the talks fell apart over a disagreement on price.

OBJECTIVE OF STUDY

To see how many investors are getting affected with the stock market

To know what all precautions SEBI has taken up to protect the investors

Set up of know your client form

Making the system more visible more simplified and more user friendly for the investors

New mechanism used to make trade and transaction faster

To understand where the system is lagging and how the government is taking measure

steps to make system more simpler

Research Methodology

Stock speculators and investors usually need a stock broker such as a bank or a brokerage firm to

access the stock market. Since the advent of Internet banking, an Internet connection is

commonly used to manage positions. Using the Internet, specialized software, and a personal

computer, stock speculators/investors make use of technical and fundamental analysis to help

them in making decisions. They may use several information resources, some of which are

strictly technical. Using the pivot points calculated from a previous day's trading, they attempt to

predict the buy and sell points of the current day's trading session. These points give a cue to

speculators, as to where prices will head for the day, prompting each speculator where to enter

his trade, and where to exit. An added tool for the stock picker is the use of "stock screens".

Stock screens allow the user to input specific parameters, based on technical and/or fundamental

conditions that he or she deems desirable. Primary benefit associated with stock screens is its

ability to return a small group of stocks for further analysis, among tens of thousands that fit the

requirements requested. There is criticism on the validity of using these technical indicators in

analysis, and many professional stock speculators do not use them. Many full-time stock

speculators and stock investors, as well as most other people in finance, traditionally have a

formal education and training in fields such as economics, finance, mathematics and computer

science, which may be particularly relevant to this occupation – since stock trading is not an

exact science, stock prices have in general a random or chaotic behavior and there is no proven

technique for trading stocks profitably, the degree of knowledge in those fields is ultimately

neglect able.

CHAPTER 2

Data Analysis

Investor Alert; Here are the major problems you will face in the next ten years of ticklish

transition from crisis to attempted normalcy. Call it the WALL OF WORRIES excerpted from

The Economist Conference on Fixing Finance. And remember; not all problems have quick

solutions, like all of the ones below.

1. Economic growth in the US unlikely to pass 2% for the next 3 to 5 years– and maybe

even up to 10 years. There can be no stimulus program in light of the expected

Republican victory in November. “This is going to be a period of pain,” said Joseph

Stiglitz, Columbia University professor. The bottom line: unemployment will plague as

because there is a 1% annual growth in labor force– but only 2% economic growth.

2. QE2 or Quantitative Easing, the expectation of pouring another trillion dollars into the

banking system is seen likely to only trigger inflation, but create no new jobs. Proof

positive; yesterday, the Treasury sold inflation protection bonds at negative interest rates–

a major sign that investors expect treasuries to drop in price as inflation rises.

3. Expect a new bubble in sovereign debt. The sign; Mexico is ready to sell a 100 year

duration bond at 6%. A very risky investment in a nation rent by a civil war with the drug

lords, in the opinion of Wilbur Ross, Jr., chairman of W L Ross & Co., one of the

nation’s most successful investors.

4. Large corporations are only part of private sector benefiting from cutting

overhead (reducing employee count) and bringing more revenues to bottom line.

5. The Fed will be sitting on its $2 trillion in cash for a long time without any practical use

for it. There is very little demand for bank loans from the private sector. Adding reserves

to the banks wont accomplish any more economic activity.

6. The economics profession let the world down because it had the tools that were politically

acceptable.

7. No solution in sight for the housing market. Wilbur Ross suggested a plan to reduce the

amount of principal owed on homes to below the mortgage debt still owed, and then let

the parties share in whatever upside can be earned on the homes. But, no plausible

mechanism to get this accomplished.

8. The shadow banking system trying to escape from the regulators. Hedge fund industry

official pleaded with Deputy Treasury Secretary Neil Wolin to allow hedge funds to

regulate themselves. Wolin was far too polite and non-0commital.Since hedge funds

gobbling up all the proprietary traders from big Wall St. investment banks.

9. China and India are graduating 7 times more engineers a year than the U.S.

10. We are papering over the structural problems in finance with bubbles. There is still great

uncertainty about the efficacy of regulation by Dodd-Frank and Basel 3.

Final note; at yesterday’s session, Vikram Pandit, CEO of Citigroup, gave what many believe

was a most bizarre performance. For several minutes he went on at length about how worried

Citi was about the ability of poor Americans to be able to borrow money in light of Dodd-Frank,

the finance reform bill. Yet, he went overboard in his adamant support of the Consumer Finance

part of the bill, seeming to separate himself and Citi from the opposition to the bill from other

large banks, namely JP Morgan.

CHAPTER 3

DATA ANALYSIS

Profile of Respondents

The analysis was based on the data collected from respondents using questionnaire. The various

demographic and economic factors regarding the respondents were as follows:

The gender ratio of respondents:

Of the total respondents, 75.64 % were males and 24.36% were females.

The age group distribution of respondents:

Age of respondents varied between 20 to 70years. It was aimed to include investors from all

categories so that the pattern will get an equitable distribution Majority of respondents were

under 30-40 year age group (34.62%) followed by 40-50 year age group (28.21%). Investors less

than 30 years of age group were25.64% and above 50 years of age group were 11.53%.

The occupational distribution of respondents:

The occupational distribution of respondents included Salaried individuals (56.41%),

Government employed (23.08%), Private organizations (33.33%), Self employed individuals

(24.36%), Business (17.95%) and Agricultural background(6.41%).

The education level distribution of respondents:

The majority of investors is having a Bachelors degree (52.56%) followed by Masters Degree

(46.15%). It's clear that most of the respondents in this study have good educational

backgrounds.

The investment experience of respondents:

From the analysis of investment experience of investors, it was found that majority of

respondents have an experience of 5-10 years (41.02%), followed by investors, having an

experience of less than 5 years (39.74%).

Stock monitoring behavior of respondents:

Of the total respondents, 87.18% daily monitor their investments in stocks and they look for

short term profits from favorable price movements. 10.26% of the investors monitor their

investment weekly and the rest 2.56% of the investors monitor monthly. Investors with different

level of investments are observed to have significantly different monitoring behavior. The

investors with high amount of investments and those with short horizon tend to monitor their

investments more frequently when compared to those with low amount of investments and long

term investors.

Investment objectives of respondents:

By analyzing the responses it could be inferred that46.15% of the investors objectives is to take

benefit from the daily price fluctuations, 11.54%of the investors make their investment to earn

steady income in the form of dividends,26.93% of the investors aim for growth objectives, while

rest of the investors have multiple investment objectives

Table1: Frequency Results for Overconfidence

Question S.D(1) D(2) N(3) A(4) S.A(5) Total

I am confident of my ability

to do better than others in

picking stocks (Stock Picking

Ability)

2

(2.56%)

12

(15.38%)

15

(19.24%)

17

(21.80%)

32

(41.03%)

78

(100%)

I am fully responsible for the

results of my investment

decisions. (Self-Control)

4

(5.13%)

13

(16.67%)

14

(17.95%)

18

(23.08%)

29

(37.17%)

78

(100%)

I have complete knowledge

of stock market (Market

Knowledge)

3

(3.85%)

11

(14.10%)

17

(21.79%)

17

(21.79%)

30

(38.46%)

78

(100%)

Figure1: Frequency Diagram of Overconfidence

The frequency results of these three statements tell reveals that investors have high level of

Overconfidence as there is greater level of confidence on their Stock Picking Abilities, high level

of Self Control and greater confidence of having Market Knowledge as majority of investors

gave rating of 4 and above in case of each parameter.

AHP determined that Overconfidence carries more than 46% weight, so it is the most prominent

behavioural dimension that has greater impact in the formation of overall behaviour followed by

Risk Preferences/Attitudes with a weight of 32% and other two dimensions Involvement and

Investor Optimism with weights 15% and 7% respectively.

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Strongly Disagree

Disagree Neither Agree Strongly Agree

Stock Picking Ability

Self-Control

Market Knowledge

Fig 5. AHP Results of Investor Behaviour

Investor Behavior

Overconfidence

46%

Stock Picking Ability

57%

Self-Control

14%

Market Knowledge

29%

Risk Preferences

32%

Familiarity Bias

46%

Risk Taking

18%

Stable Returns

27%

Enjoyment From Risky

Trading

9%

Involvement

15%

Trade Activity

75%

Quick Money

25%

Investor Optimism

7%

Price Increase Expectation

54%

Index Recovery

30%

Increased Investments

16%

CHAPTER 4

Compilation of Data

This paper analyses investment behavior of individual investor in terms of four broad behavioral

dimensions viz; Overconfidence, Investor involvement, Optimism and Risk attitude that are

measured in terms of different factors. The findings suggest that the dimension of overconfidence

plays an important role in the determination of overall behavior, followed by the role of risk

preferences, involvement and optimism.

In this study overconfidence bias is measured in terms of four factors: self control, market

knowledge, stock selection ability and specific skills. It's clearly found that majority of investors

believe that they have better stock picking ability than other investors. They also believe that

they have complete knowledge of market particularly those investors who have many years of

investment experience. They are found to be confident of their specific skills that lead them to

earn profits over their investments.

When studied the level of optimism among investors in terms of their outlook of future of the

stock market, we found that investors are not much optimistic about the future of market. It's

found that some investors want to keep their investments in the stock markets only because the

stock prices have declined and they do not want to sell their stocks at a loss. Very few showed

willingness to increase their investments in the stock market in next 12 months because they do

not believe that stock market will not scale up immediately.

The dimension of investor involvement is measured in terms of their trade activity and tendency

to make quick money. It was found that investors having short term profit seeking objectives are

found to have greater level of involvement as compared to those with long term investment

objectives as they have greater tendency to make quick money in short time periods.

When measured risk preferences of individual investors we found that investor’s exhibit risk

averse behavior and they prefer investing in familiar companies with stable returns. But there are

some investors who showed a strong preference for taking risk. It's found that investors with

long term investment objectives and those with ages above 50 are more risk averse when

compared to others.

Majority of investors seem to prefer to gamble with a possibility for a gain .Analysis shows that

individuals have inconsistent attitudes towards risk in making investment decisions. They exhibit

risk aversion in a profit making situation while risk seeking behavior is exhibited in a loss

making situation that explains the phenomenon of mental accounting. Moreover the presence of

disposition effect and representativeness are also confirmed by this study.

This paper analyses investment behavior of individual investor in terms of four broad behavioral

dimensions viz; Overconfidence, Investor involvement, Optimism and Risk attitude that are

measured in terms of different factors. The findings suggest that the dimension of overconfidence

plays an important role in the determination of overall behavior, followed by the role of risk

preferences, involvement and optimism.

In this study overconfidence bias is measured in terms of four factors: self control, market

knowledge, stock selection ability and specific skills. It's clearly found that majority of investors

believe that they have better stock picking ability than other investors. They also believe that

they have complete knowledge of market particularly those investors who have many years of

investment experience. They are found to be confident of their specific skills that lead them to

earn profits over their investments.

When studied the level of optimism among investors in terms of their outlook of future of the

stock market, we found that investors are not much optimistic about the future of market. It's

found that some investors want to keep their investments in the stock markets only because the

stock prices have declined and they do not want to sell their stocks at a loss. Very few showed

willingness to increase their investments in the stock market in next 12 months because they do

not believe that stock market will not scale up immediately.

The dimension of investor involvement is measured in terms of their trade activity and tendency

to make quick money. It was found that investors having short term profit seeking objectives are

found to have greater level of involvement as compared to those with long term investment

objectives as they have greater tendency to make quick money in short time periods.

When measured risk preferences of individual investors we found that investor’s exhibit risk

adverse behavior and they prefer investing in familiar companies with stable returns. But there

are some investors who showed a strong preference for taking risk. It's found that investors with

long term investment objectives and those with ages above 50 are more risk averse when

compared to others.

CHAPTER 5

Findings and recommendations:

Prices of useful items are ever increasing. But does our income also increase at the same rate?

Are our savings sufficient enough to take care of our future expenses? Most of us will have a

negative response to these questions. So, how does one prepare himself for these known as well

as unknown future expenditures? The answer is by investing. There are a number of investment

options available. In a country like India, people invest in gold, silver, post-office savings, term

deposits etc. The major factor that one must consider before investing is return. The return

should be more than the rate of inflation otherwise there is no point of making such an

investment.

There is a theory which says that to get more return, you have take more risk. One of the major

investing hub, which is not so popular in India, is the stock market. There is a belief regarding

them that they are a ground for gambling. This ideology is actually a misconception. If the

investor follows some basic principles, the chances of failure are reduced to a large extent.

The return which a person can get in a stock market can be very very high. It made Azeem

Premji a very wealthy person when Wipro’s share went high in the late 90s. It can even reduce

the wealth of the promoter which is recently been seen by Vijay Mallya where Kingfisher’s

shares are exceedingly low. So how does a normal person like you and me invest in stock market

given its huge volatility? Here again, it depends upon the type of return the person wants from

his investment. Remember, largest returns come from taking the biggest risk. But, failing there

can bring huge losses which we as small or medium investors can not afford to take.

Most of the people nowadays have a bank account. When we enter the branch of any bank, there

is a customer relationship manager there. This person can be of big help if we consider taking the

help of bank for our investments. The bank gives its customers a manager depending upon the

investment size of the customer. This person takes care of customer’s investments though not

completely. The customer has to agree to the investment options given by the manager. So, again

we fall back on the same question that how do we choose where to invest?

When a person wishes to invest in stocks, he should keep an eye on the news that goes around

the stock market. From such information, he can get a fair idea which companies are performing

well. Even the stock exchange has a list of top 50 or top 30 companies. When the person gets a

fair idea about the companies, he should then look at the past years (2-3 years) balance sheet and

see whether the company is performing well or not. Then, he should also look at the stock price

curve of the company. If the curve has been consistent, he should make an investment in the

company. When a person invests, he should make sure that he is not investing all his money in a

single firm. This is because, if the stocks fall, all the money will be lost. Even investing in the

same sector (airline, petroleum) should be avoided due to the same reason. The portfolio of the

person should be diversified. There should be investments across many sectors and firms. This

reduces the risk to a great extent.

Still there are a lot of people who do not invest in this fashion. Either they have the good old

opinion about stock market or they lack knowledge about investments. For such people,

investing in mutual funds is a good option. All the burden of investing is looked after by the MF

manager. It informs about all the risks which are associated with the investment. The person just

needs to choose the investment portfolio.

Investment in stock market is a risky proposition. It requires that the person be alert and

conscious about his investments. Bad times are bound to come when the market will crash.

During such phases, the investor needs to be patient and work to minimize the loss. The loss can

be minimized by having a pre-decided stop loss limit beyond which if the stock price falls, he

should sell. Most of the people keep a stop-loss limit of 85 % i.e. if the market price falls below

85% of purchase price, the stock should be sold without any second thoughts. This is important

for people who have limited capacity to bear losses. Turbulent times have little significance for

people who wish to invest for a long term (2 years or above). These people buy stocks of market

leaders and remain dormant for some time and then sell these to earn profit.

So to conclude, the investor should decide his return, his capacity to bear loss and the time

period of investment before investing in stock market.

CONCLUSION:

From the above findings I would like to conclude the following observations:

Investors face lots of problem in the stock market due to internal factors and external

factors. To be more precise internal factors means hedging, speculation, arbitraging

which makes prices very sensitive a normal investors would literally bur his fingers if he

tries to enter the volatile markets.

External Factors means dicey economy and global turmoil which makes investors lose its

confidence and get panic.

It’s not only markets who creates vulnerability to the investors, Investors also digs the

danger pit from themselves by entering the market without having any knowledge and

starts investing in the market more on that they start trading in the market which makes

haphazard situations for other investors.

If you compare advantages and disadvantages of investing in India, it is a very difficult

question to answer. It is a big risk – but it is worth taking. Many of them have gone ahead

with huge commitment to India, even though possibility of failing in India is equal to the

success.

If you are a regular reader of this blog I have written a lot on why you should you invest

in India. In this post, I will very briefly touch upon the challenges faced. This post is also

part of the series that I have been running on “Key Success Factors of doing business in

India”.

Indian economy at present is doing very well, infact in last quarter India registered a GDP

growth of 9.2 one of the fastest in the world. However, with it, inflation has grown at

equally fast pace hovering somewhere around 6% to 7%. In the space of two years India

has swung from a current account surplus to a deficit equal to 3% of GDP, indicating a

growing gap between demand and supply cover story in The Economist in February 2007

examined the potential for overheating of India’s economy and presented the possibility

of sustainable future growth, making the inevitable comparisons with China.

The Economist observed “Perhaps the only thing really growing faster in India than

China is hype.”

Even with a huge population, India is still facing a shortage of qualified employees due to

inadequacies of the public educational system. This is pushing wage rates up and eroding

the cost advantage that has driven much of the economic growth in India in the past

decade.

The state of Infrastructure in India is bad, if not worst. If India has to reach its goal of

becoming a super power, drastic improvements are essential in roads, seaports, airports,

power grids, and communication systems, as well as improved education and health care.

There is a huge difference in culture when it comes to doing business in India. However,

for a westerner it is masked initially as they are used to dealing with persons of Indian

origin in business contexts in the U.S and UK. Business negotiations in India are often

characterized by indirection, ambiguity and seemingly endless revisiting of settled issues,

and in most cases agreement is just the starting point for the next negotiation.

Corruption in government and throughout the economy adds to the cost of doing business

and presents legal and ethical challenges for U.S. companies. Indian courts are said to

have a backlog of 27 million cases, and it can take decades for disputes to be resolved in

the courts. Patent protection is granted grudgingly and slowly. Labor laws are not very

friendly. What is put forth by government officials about trade liberalization and open

markets is not always what is played in reality.

India is one tough place to do business.

The picture does look grim, however, despite its many challenges and

uncertainties, India is and will continue to be one of the most important nations of

the 21st century, both strategically and economically, and the potential for

investment by foreign corporations in India is great. Moreover, it is one of the most

fascinating places on the face of the earth in which to do business.

SUMMARY:

Lack of awareness: Majority of the population do not know about the capital market activities.

This may be because of their educational background, income levels, and accessibility to the

market. Awareness is essential to deal with the trading activities otherwise there may be huge

losses for the investors. Economic reforms had opened the way for all foreign players to enter in

to the Indian market. It has become more complex to understand the stock market especially for

the retail investors.

Real estate boom: Presently the real estate sector is attracting more investors compared to

any other sectors. This is due to high potentiality of gains and continuous increasing prices of

real estate assets. Mainly with the advent of Multi National Corporations (MNC) the urban based

real estate sector is expanding in a rapid manner. Retail investors are showing more interest

towards real estate investment rather than capital market investment. Many corporate giants like

DLF are expanding the real estate and property business; so many people are following the same

investment practices.

Stock Market volatility: the main aspect which affecting the retail investors entry is the

market volatility. Sometimes the massive decline in the indices is also one

important problem faced by the retail investors. Scams like Harshad Mehatha, Khethan Parekh

etc.., are also lagging behind the entry of retail investors. The BSE Sensex declined by 826

points on 18th May, 2006 and 616 points on 2nd April, 2007 and 615 points on 1st August, 2007

and 541 points on 27th July, 2007. Recently we are experiencing the continuous down trend in

the stock exchanges. Despite a strong response to the Rs. 11000-crore IPO of Reliance Power (R

Power), the market fell sharply with 30-share BSE Sensex shedding 476.96 points or 2.30% to

20,251.09 on Tuesday,15 January 2008 as heavyweights faced selling pressure. Bharti Airtel,

Reliance Energy and ICICI Bank slumped. All the sectoral indices on BSE were in red. Banking,

FMCG and power stocks were worst hit in the fall. The Sensex lost 382.98 points or 1.89% to

19,868.11 on 16 January 2008 as the prospects of a recession in the United States triggered a

sell-off in the global markets. The market remained subdued for the day although it made some

recovery from its lows in the late trade. The market breadth was weak. The market slipped for

the fourth straight session with Sensex declining 167.29 points or 0.84% to 19,700.82 on

Thursday, 17 January 2008, giving up early gains as index heavyweights Reliance Industries

(RIL) and ICICI Bank declined. RIL dipped after it reported Q3 December 2007 results, which

were boosted by one-off gains. The market breadth was strong. Sensex plunged 687.12 points or

3.49% to 19,013.70 on Friday, 18 January 2008, in a broad-based decline. Reliance Industries

(RIL), ICICI Bank and DLF, plunged. All the sectoral indices on BSE were in the red. BSE oil &

gas and realty indices were the worst hit in the fall. Small-caps and mid-cap stocks sank.

Protection of interest of retail investors: According to SEBI norms every listed company

which is issuing the shares through 100 percent book building process should reserve 35 percent

of shares for the retail investors. Many of the IPOs between the year 2003 and 2005 were found

to be fraudulent, with the multiple demat accounts only few investors were allotted with more

number of shares. These types of incidents are making the retail investors to think again and

again before entering in to the market. The regulatory authorities have taken some initiations in

this regard, even though; they failed to fulfill the confidence in to the retail investor‟s minds.

Intermediaries: Majority of the retail investors cannot take their own decisions to purchase or

to sell the shares. In general, Intermediaries such as stock brokers and sub brokers influence their

decisions. Sometimes the brokers or sub brokers may mislead the investors. Mainly to get their

remuneration in the form of service charges or commission they may suggest inefficient

company shares also. The regulatory authorities are not able to curb on the activities of these

intermediaries.

Alternative investment avenues: This is also one of the reasons for the poor response from

the retail investors. A survey conducted by Max New York and national Council for Applied

Economic Research (NCAER) reveals that Indian households keep 65 percent of their savings in

liquid assets like bank or post office deposits and cash at home, invest 23 percent in physical

investments like real estate and gold and only 12 percent in financial instruments.

Technological problems: Generally the retail investors do their trading through the share

brokers. Thanks to the on-line trading facility, the accessibility problem has been reduced. But,

the poor technology is leading to heavy losses for the retail.

investors. They are not able to sell/purchase shares in line with the movements. Many retail

investors who trade shares online are unable to tap the best price movements on the bourses,

thanks to connectivity problems or log-in delays. “This Monday when the market dipped in the

morning I could not trade on my Web site for a whole hour till 11 a.m.,” said Mr T. Ramesh,

who is a customer of ICICI Direct.com.

Strategies to overcome problems

The retail investors are needed to be attracted by the markets. To attract them the regulatory

authorities such as Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI),

Ministry of Company affairs, Ministry of Finance have to take certain initiative and corrective

actions.

Awareness creation: The most important thing is to create awareness among the masses. This

could attract them to invest in the capital markets rather than other investments. It is necessary to

establish training institutes to train the professionals who are dealing/working in the stock market

related fields. For this the regulatory bodies may take the help of other professional bodies like

Institute of Chartered Accountants of India (ICAI), institute of Cost and Works Accountants of

India (ICWAI), Institute of company secretaries of India (ICSI) and others. Through awareness

one can attract the retail investors easily. The regulatory authorities also have to organize work

shops, seminars, and campaigns etc... To making the people to know the practicalities of the

capital markets. As per the Disclosure and Investment Practices (DIP) guidelines the

shareholders are entitled to the following rights. Some of them are as follows;

To receive the share certificates, on allotment or transfer (if opted for transaction in physical

mode) as the case may be, in due time.

To receive copies of the Annual Report containing the Balance Sheet, the Profit & Loss account

and the Auditor‟s Report.

To participate and vote in general meetings either personally or through proxy.

To receive dividends in due time once approved in general meetings.

To receive corporate benefits like rights, bonus, etc. once approved.

To apply to Company Law Board (CLB) to call or direct the Annual General Meeting.

To inspect the minute books of the general meetings and to receive copies thereof.

To proceed against the company by way of civil or criminal proceedings.

To apply for the winding up of the company.

To receive the residual proceeds.

Besides the above rights, which you enjoy as an individual shareholder, you also enjoy the

following rights as a group:

To requisite an Extra-ordinary General meeting.

To demand a poll on any resolution.

To apply to CLB to investigate the affairs of the company.

To apply to CLB for relief in cases of oppression and/or mismanagement.

Regulation of intermediaries: In this regard the regulatory bodies have to act strictly. Being

the intermediaries are the key players in the market it is necessary to govern these. The practices

of client registrations with brokers or sub brokers

depository participant‟s activities are to examine with regular intervals. The commission charges

and service charges are needed to be reviewed and necessary measures are to be taken wherever

necessary.

Quota protection: As we discussed earlier, the reserved quota for retail investors (35 percent,

if the is 100 percent through book building process) should be allotted to retail investors only. It

is the responsibility of the regulatory authorities to ensure that the entire issuance is according to

the norms. The multiple demat accounts opening and malpractices of few people are to be

observes, if anybody found to be guilty they should be penalized.

Corporate Governance Practices: Retail investors will trust the capital markets when they

are transparent. The corporate governance practices are needed to be followed by the every

participant in the capital market. This can be the most prominent tool to build the confidence in

the minds of the retail investors.

Priority to the retail investors: In the recent past, we have seen the exponential growth of

foreign Institutional Investors (FIIs), Qualified institutional Buyers (QIBs) that growth may be

because of the Government policies, rules and regulations. It is desirable to give priority to the

retail investors also. Every time when the stock market crashes generally the retail investors are

becoming the victims. It can be avoided by concentrating equally on the retail investors.

Corporate Governance Practices: The regulating authorities have to ensure that all the

corporate organizations are practicing good corporate governance practices. This in turn will

improve the confidence of the retail investors. Many violations are taking place in the global

financial markets in this regard. In all the scams retail investors are losing huge amount. The

incidents like Global Trust Bank, the recent issue of Satyam computers etc. are making the retail

investors to not to invest in the capital market.

Technology improvement: The technology plays vital role in selling/ purchasing the

financial instruments. The on-line terminal system should be improved. Many retail investors are

not able to sell/purchase during volatile situations. Stock exchanges should provide the best

quality technology service to the investors.

CHAPTER 6

BIBLIOGRAPHY

Bloomfield, Robert J, Libby, Robert and Nelson, Mark W., “Confidence and the welfare

of less informed investors”, Social science research network.

Brancato, Carolyn Kay. (2002), “Singapore corporate and investor confidence”,

Conference board site of KPMG.

Gupta, L.C. (1996), “Challenges before Securities and Exchange Board of India (SEBI)”,

Economic and Political weekly, March 23, pp 751-757.

Hall, John.H., “Are brokers‟ buy, hold and sell recommendations of value to individual.