CHAPTER - I INTRODUCTION

Transcription

1 CHAPTER - I INTRODUCTION Introduction Chapter deals with a brief note about importance of capital market, Statement of the problem, Objectives of the study, Hypothesis, scope of the study, Geographical coverage, Field work and collection of data, Limitations of the study, Research methodology, Main study, Sample size, Tools used in the study, Operational definitions and Chapter arrangement. The capital market is used as a main vehicle to mobilize funds for the economic growth of the country. It performs crucial functions like the conversion of savings of the households and institutions into investment, creation of financial assets and development of asset-related products. A well functioning securities market is conducive to the sustained economic growth of any country in the world 1. There exists a direct relationship between the development in the securities market and economic growth of a country. The securities market provides a bridge between ultimate savers and ultimate investors and creates the opportunity to put the savings of the cautious at the disposal of the enterprising, thus promising to raise the total level of investment and growth. It allocates scarce savings to the enterprises and forces them to focus on their performance, which is continuously evaluated through share prices in the market. It thus converts a given stock of investible resources to a large flow of goods and services. The development of the securities market changes the quantum and composition of savings and investment of the households. The availability of yieldbearing securities induces people to consume less and invest more in high yielding, divisible, liquid securities. A strong domestic stock market performance forms the basis for the well performing domestic corporate to raise capital in the international markets. The securities market facilitates the internationalization of the economy by linking it with the rest of the world. This linkage happens through the inflow of capital in the form of portfolio investment. 16

2 Financial markets across the globe are undergoing profound, unprecedented and fast paced changes 2. Technology has revolutionized the processes and the information explosion has sparked off remarkable changes in the way the world market has been operating. Change has become an inevitable phenomenon. Indian Capital market is one of the fastest growing markets in the world. It has grown impressively during the recent years in tune with the global financial markets. The Indian Capital Market comprises of two segments, namely, the Primary and the Secondary market. The fresh issue of securities takes place in primary market and trading among investors takes place in secondary market. The primary market is the major channel through which the savings of the households are mobilized by the companies directly for investment purposes. It is the centre stage of the capital market that really boosts industrial and financial activities by providing long term funds to the corporate and the government. It infuses new securities, adding volume and wider base of securities in the secondary market. The secondary market affords liquidity to the investment in securities and reflects the general health of the economy. Indian corporates mainly raise funds through capital market. Two types of capital are essentially raised viz., Equity and Debt. Equity forms part of the net worth and the Debt forms part of the outside liability of the firm. The capital raised through equity is superior to that of debt capital for both the firm and the investor. Equity enhances the borrowing power of the firm from banks and financial institutions. If a firm is able to mobilize sizable amount of equity capital through primary market, it can approach banks to fund long-term investment. From the investor s point of view, it could be noticed that over the long term, the equity investments have out-performed debt and other asset classes across the globe. In India, looking at the 8 years Compounded Annual Growth Rate (CAGR), equity returns have out-performed debt to the tune of 15.8 percent 3. The Indian Capital Market has witnessed unprecedented euphoria from the early nineties and it has won critical appreciation from various quarters 4. At present there are 19 Stock Exchanges in India. The National Stock Exchange (NSE) and 17

3 Bombay Stock Exchange (BSE) together account for more than 99 percent of the total turnover having a combined market capitalization of $ billion. Around 9600 companies are listed in NSE and BSE. Success of equity issues totally depends on the confidence of the investors. If the investors perceive high profitability prospects, they will invest in equity. There are two types of investors, namely, institutional investors and retail investors (households). Institutional investors are huge investors who operate through Portfolio Managers. Portfolio Managers only shuffle around the holdings in the existing scrips in their basket, based on their subjective evaluation of various scrips but they do not inject the much needed risk capital to upcoming enterprises to undertake new industrial activities. Even Foreign Institutional Investors (FII s) generally bring capital into the country only to acquire shares in the existing highly profitable companies but do not provide risk capital to the corporate world. It is the Retail Investor i.e. the household sector, who is the only source of providing risk capital 5. The Retail Investor provides this risk capital, either directly by investing in equity market or through collective schemes popularly called as Mutual Funds. There are 39 Mutual Funds offering about 600 schemes to the households, managing assets to the tune of Rs. 3,10,171 crores (US $ 68 billion) at the end of October Indian retail investors have been directly participating in equity markets and taking price fluctuations for decades. The household sector generates more than $ 30 billion of savings every year, which is available to the Indian financial system. It is the only source of providing risk capital within the country. It is globally recognized that the growth of the economy depends to a large extent on the growth of the securities market, as it provides the vehicle for raising resources and managing risks. The growth of the securities market is the result of high confidence of the investors, that too the retail equity investors, the only risk capital providers of yesterday, today and tomorrow. 1.2 STATEMENT OF THE PROBLEM The stock market is one of the most vital and dynamic sectors in the financial system making an important contribution to the economic development of a country. 18

4 Investors are the backbone of the capital market and they are not alike. Institutional investors are capable of understanding the intricacies involved in the stock market activities but the retail investors lack adequate awareness about it. As the bulk of the savings of the country generally emanate from the households, and the retail investor is still the major source of risk capital to upcoming enterprises, to undertake new industrial activities, the capital market cannot grow without their participation, directly or indirectly. With the liberalization of the Indian capital markets, securities market has grown into one of the most dynamic, modern and efficient markets. The infrastructure and operating efficiency of the Indian stock markets are well appreciated by its global counterparts. In India, to encourage, enhance and safeguard retail investor participation and to make the markets more efficient, a number of reforms have been initiated by the Security Exchange Board of India (SEBI). In the case of fixed price public issues and book built issues, 50 percent and 35 percent shares respectively are being allotted to the retail investors 7. As small investors find it difficult to participate directly in the capital market to a significant extent, SEBI encourages mutual fund industry to offer innovative products to suit the risk appetite of the retail investors. In spite of all the efforts taken by SEBI to attract and enhance retail participation, the household (retail) savings and investment scenario is highly disappointing. According to the SEBI NCAER survey, only 7.4 per cent of the Indian households directly participated in the securities market in 2000 as against about 50 percent in the USA. As the economy grew at 8.5% in , GDS (Gross Domestic Savings) rate reached 28.1 percent of GDP, (Gross Domestic Product) and the household financial savings increased to 11.4 percent of GDP, but the capital market instruments contributed barely 1.4 percent of the financial savings and investment. In , though India s GDS in proportion to GDP was 29.1 percent, the investment by households in shares and debentures stood at a meager 0.8 percent of GDP 8. 19

5 Despite the developments happening in the capital market in India and even after a decade of existence of a vibrant capital market, the equity instruments are not considered as an attractive household investment. The ill effect of such a phenomenon is that, if such a situation persists, the performance of the capital markets will be determined and dominated by a few large and wealthy players. High dependence on FII funds will lead to a volatile and high risk market which will make the retail investor the only risk capital provider-extinct. This will hamper the whole growth of the securities market and in turn the economic growth of the nation. So bringing the retail investors back into the equity market would be a very healthy structural development for the nation itself. The recent economic recession had a great impact on stock market. The developing countries also taste the economic downtrend. The Indian economy is also not left out. Before the recession, Indian economy was moving at a faster rate because of the growth in information technology and other sectors. But after the recession the economic level comes down and there will be some velocity in the Indian stock market conditions. As the regulatory system is so strong in India, the stock market is able to withstand many odds. Since the stock market is all the time unpredictable and unstable, the investors are all the time at very high risk. They have to consider many factors like Economic environment, Political stability, Industrial growth etc., before they invest. Though there are many studies on the stock market related areas, the information provided to the investor and industry is not sufficient. As a result the investor and the stock market players will be searching for required information. There are some research gaps in the existing literature relating to the stock market. Hence the current study is undertaken to fill the gaps in the existing research in the field of stock market and also to provide required information to the investors as well as industry. 20

6 1.3 OBJECTIVES OF THE STUDY 1. To study the investment pattern of retail equity investors in Chennai. 2. To analyse the information search and investment option of retail investors. 3. To identify the various investment preferences and investors perception on risk and return. 4. To examine factors influencing investment evaluation and decision of investors. 5. To evaluate investors level of satisfaction and their futuristic perceptions towards retail equity investment. 6. To find the relationship between demographic variables of investors and their investment objectives, decision and satisfaction. 1.4 RESEARCH HYPOTHESES 1. There is no significant difference between level of risk and returns of investors. 2. There is no association between investment objectives and satisfaction. 3. There is no association between investment decision and satisfaction. 4. There is no significant influence of demographic variables of investors and investment objectives, decision and satisfaction. 5. The factors of level of investor s satisfaction do not differ significantly with respect to share investments. 1.5 SCOPE OF THE STUDY The present study covers the investment pattern with regard to retail investment in equity shares. This study opens fascinating vistas over investor s 21

7 preference, perceptional differences and their predominant objectives. This also paves the way to study the pre and post investment satisfaction in an intensified manner. It also focuses exact problems associated with equity investment of retail equity investors in Chennai city. 1.6 GEOGRAPHICAL COVERAGE The area of coverage of the study is Chennai the capital of Tamilnadu in India. Chennai is opted for study because of its role in industrial and economic development of the country. 1.7 FIELD WORK AND COLLECTION OF DATA Personal interview by the researcher is the major tool used for data collection. Structured interview schedule is used during personal interviews. Interviews are conducted at various stock broking houses and at the residence of the equity investors at their convenience. Before the interview, proper rapport is established. The data collected are recorded by the researcher in the interview schedule. The schedules thus filled up are thoroughly checked to ensure accuracy, consistency and completeness. On an average, each interview took about an hour. The data thus collected were categorized and posted in the master table for further processing. 1.8 LIMITATIONS OF THE STUDY The major limitations of the study are:- The study is confined to Chennai District alone. Hence the findings may not be generalised for the other parts of the country. The study is confined to the retail equity investors alone. Institutional investors remain uncovered. The limitations associated with the statistical tools are applicable for the tools employed in this study also. 22

8 RESEARCH METHODOLOGY 1.9 PILOT STUDY AND PRE-TESTING A preliminary investigation is undertaken by contacting 75 investors of equity shares to identify the important variables regarding characteristic features of equity shares, instrument and the changes, return of investments, investment decisions and satisfaction. The purpose of the pilot study is to test the quality of the items in the questionnaire and to confirm the feasibility of the study. This preliminary investigation is conducted in different parts of Chennai. The random sampling method, Cronbach alpha method and Hotellings t-square test are applied. It is found that the Cronbach alpha value is and hotelling t-square value is which are statistically significant at 5 per cent level. It is ascertained that the items in Likert s five point scale of the questionnaire are highly reliable and the samples satisfy the normal distribution rationally. So, the items in the questionnaire can be used further in the study MAIN STUDY The data is collected for the study by means of a two section questionnaire (refer Appendix). Section 1 for the questionnaire is framed to obtain the general information about investment preferences, percentage of investment in equity shares and different portfolio and sources of information of the equity investment. Section II deals with the characteristic features of equity shares, their changes, and return on investments. The section I of the questionnaire is designed in optional type, where as the section II is designed in Likerts 5-point scale, ranging from 5-strongly agree, 4-agree, 3-neutral, 2-disagree, 1-strongly disagree. The questionnaire with covering letter is handed over personally to each and every respondent and they are requested to return the filled in questionnaire after 15 days, when the researchers visit them. The respondents took the period of 15 days to 2 months to return the completed questionnaire. 23

9 1.11 SAMPLE SIZE Initially 623 questionnaires are circulated to investors in all the areas of Chennai city, by following simple random sampling method. Out of the 623 questionnaires only 514 respondents returned the filled in questionnaires. But only 507 of them are found usable. Hence, the exact sample of the study is DATA ANALYSIS The sources of data are primary as well as secondary. The data collected from the investors survey constitutes primary and information gathered through books, journals, magazines, reports, dairies are considered as the secondary source. The data collected from both the sources is scrutinized, edited and tabulated. The data is analyzed using statistical package for social sciences (SPSS) and other computer packages. The following statistical tools are used in the study. 1. Measures of central tendency and measures of dispersion. 2. Parametric t-test. 3. One-way analysis of variance. 4. Factor analysis. 5. K-means cluster analysis. 6. Multiple discriminant analysis 7. Multiple regression analysis. 8. Non-parametric chi-square analysis 1.13 OPERATIONAL DEFINITIONS a. Investment The use of capital is to create money, either through income producing vehicles or through more risky ventures designed to create capital gains. 24

10 b. Investment Practices Usual and repeated way of doing investment (i.e.) usual investment pattern, preferences, perceptions, investment objectives, factors generally influencing investments, investment satisfaction, investor s confidence and problems faced by investors regularly. c. Retail Equity Investor Individual share investor or households investing in shares or small investor. d. Institutional Investor Corporates investing huge money in securities. e. Primary Market A market where corporates directly issue securities i.e., where initial public offering is made. f. Secondary Market A market where the already issued securities are traded. g. Mutual Funds Small investor, collective investment scheme. h. Derivatives Financial contracts, whose values are derived from the value of an underlying primary financial instrument (i.e.) stock futures and options. i. Dividend The part of company s profit distributed to shareholders. j. Capital Gain 25

11 Gain arising due to sale of stock. k. Liquidity Availability of stock coupled with buyers and sellers for it in the market. l. Volatility Sharp rise or fall of share prices over a short period of time. m. Rights, Bonus and Stock Splits Rights : A Method of raising additional capital from the existing share holders. Bonus : Shares are issued to the existing shareholders at free of cost in some decided ratio. Stock splits : Splitting the face value of existing shares and distributing additional shares on pro-rata to shareholders. n. Floor Based, Forward Trading Trading on the stock exchange floor, where contracts traded today are settled at some future date at the price decided today. o. Anonymous Screen Based Electronic Trading Buying and selling of securities using computers and electronic matching of orders on price / time priority without knowing who the trader is. p. Clearing and T+2 Rolling Settlement Clearing is the process by which all the transactions between members are settled. T+2 Rolling Settlement is the system where trades executed during the day are settled based on the net obligations for the day. The maximum time that may be taken for settlement is T+2 (i.e.) Trading day + 2 working days. 26

12 q. Straight Through Processing (STP) STP is a system, which allows electronic capturing and processing of transactions in one pass from the point of order origination to the final settlement. r. Dematerialisation The process by which shares in the paper form are converted into electronic form popularly called as demat. s. Market Capitalisation The market value of a company found by multiplying the number of ordinary shares outstanding with its current market price. t. Fundamental Analysis Method of predicting the behaviour of company stock by looking at fundamental information about the company such as financial health, sales, earnings and dividends. u. Technical Analysis Techniques of predicting share price behaviour by studying the price movements and trading volumes using charts. v. Corporatisation and Demutualisation The system where ownership, management and trading membership would be segregated from one another. w. Settlement Guarantee Fund Fund maintained by the stock exchange to take care of investor claims, which may arise out of non-settlement of obligations by the trading member as he has been declared a defaulter or expelled. 27

13 x. Circuit Breakers It is an investor protection measure by SEBI to curb excessive price volatility. It brings about a nation wide coordinated halt in trading on all equities. y. Mark-to-Market Margin It is a risk containment measure computed based on mark-to-market loss of a trading / clearing member. z. VaR Based Margins It is a risk containment measure intended to cover the largest loss that can be encountered on 99% (value at risk) of the days CHAPTER ARRANGEMENT Chapter - I Introduction - deals with a brief account on history of equity shares, elements of equity shares, need and importance of the study and research methodology. Chapter - II Review of literature - relevant to the present study, studies on information search, awareness of factors of characteristics of equity shares and capital market and investment preferences are included in this chapter. Chapter - III A conceptual frame work of Indian Equity shares - An Overview - explains the growth of the market, trends in various years and certain important overviews. Chapter - IV Analysis of investment preference and decision deals with an analysis of primary data with the help of statistical tool. Chapter - V Analysis of investment satisfaction and portfolio choice encounters with multivariate statistical analysis of the primary data 28

14 Chapter - VI Summary of Findings, Suggestions and Conclusions - summarizes the findings along with the suggestions to the investors for framing the investment strategies SUMMARY In this chapter, the research design is adopted as per the norms and followed by review of literature in the next chapter. REFERENCES 1 Levine and Ross, Stock market Development and Economic Growth, The world Bank Economic Review, Vol. 1012), 2008, pp: Bajpai G.N, Indian Securities Markets New Bench Marks, SEBI Bulletin, Vol.1, No.8, August 2009, pp: Retail Investments into Equity, IIM Working paper series, E27119, p:4. 4 Tarapore wala, Russi Jai, The Union Budget and the Capital Market, BMA Review, Vol. III, No.26, March , Ramesh Gupta, Retail Investor A lost Species, IIM Working paper series, E 15378, p:1. 6 Chopra V.K, Capital Market Reforms in India: Recent Initiatives, SEBI Bulletin, Vol.4, No. 11, Nov 2008, pp: Chopra V. K, Investor Protection: An Indian Perspective, SEBI Bulletin, Vol.4, No.11, Nov 2010, pp: Ibid., Pp