INDIAN JOURNAL OF MANAGEMENT SCIENCE (IJMS) EISSN -79X ISSN 49-080 54 AN EMPIRICAL ANALYSIS ON PERCEPTION OF RETAIL INVESTORS TOWARDS DERIVATIVES MARKET WITH REFERENCE TO VISAKHAPATNAM DISTRICT Mrs. E.V.P.A.S Pallavi, Assistant professor School of Management Studies, M.V.G.R.College of Engineering, (Approved by AICTE, New Delhi & Affiliated to JNT University, Kakinada) Vijaynagar Campus, Chintalavalasa, Vizianagaram, India. Dr.T.Kama Raju, Professor & H.O.D, Dr. B. R. Ambedkar University, Etcherla, Srikakulam Andhra Pradesh, India. ABSTRACT The derivatives market is witnessing tremendous growth in India. The statistical data reveals that the total turnover of futures and options in NSE market are Rs 750.0 billion and Rs 4780.0 billion respectively by 0-. The retail and institutional investors occupied a key role in development of derivatives trading in India. Retail investors are the major participants in equity derivatives have contributed 5% higher when comparing with institutional investment. As large number of retail investors are participating in derivatives trading, this study has been taken to identify the retail investors Perception on derivatives trading. The research design chosen is descriptive. The data was collected using a questionnaire that consists of close ended questions. Convenient sampling method is employed in Visakhapatnam District. After review the available literature, the statistical analyses were performed by using % analysis, Chi Square, and F-test. Keywords: Evolution of Derivatives Market, Derivatives users, Retail Investors, Perception of retail investors.
INDIAN JOURNAL OF MANAGEMENT SCIENCE (IJMS) EISSN -79X ISSN 49-080 55 Introduction: The emergence of derivatives market is an inventive feat of financial engineering that provides an efficient and cost less way out to the problem of risk that is entrenched in the price volatility of the underlying asset. In India, the emergence and growth of derivatives market is relatively a recent phenomenon. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives of world over, futures and options have gained more popularity then on individual stock, especially among retail investors, who are major users of derivatives. Availability of liquidity, level of standardization, clearing and settlement of futures and options transactions are major reasons for their growing use. At the same time cost associated with trading of derivatives, broker services, volatility levels, regulations of derivatives trading and risk tolerance are the complex problems of retail investors of derivatives. Keeping the above facts the present paper gives an attempt to understand the level of awareness of retail investor s instruments and also to find out their problems and satisfaction levels in trading of derivatives. Research Methodology: Objectives of the Study:. To understand the profile of the retail investors of derivatives in Visakhapatnam District.. To analyze the perception of investors regarding the derivatives market. To review the problems and satisfaction levels of retail investors in derivatives market. Literature Review: A number of research studies have been carried out on different aspects of risk and Investment Management. But a very few literature is available in this segment. Alagu Pandian,V. (0) found that derivatives products provide certain important financial benefits such as risk management or redistribution of risk away from risk-averse investors towards those more willing and able to bear risk. An attempt was made by Shaik Abdul Majeeb Pasha (0) 7 to know what kind of perceptions had by retail investors in India based on Andhra Pradesh State reference with a sample size of 500 respondents. Ultimately, financial derivatives should be considered part of any investor s risk management strategy to ensure that value enhancing investment opportunities are pursued. Shanmngasundaram, V. (0) 0 examined the impact of behavioural dimensions of investors in Capital market and found that investor decisions are influenced by psychological factors as well as behavioural dimensions and this psychological effect is created by the fear of losing money, sudden decline in stock indices, greed and lack of confidence about their decision making capability. Sandeep,S., & Surendra, Y.S. (008) in their article conducted a survey of brokers in the recently introduced derivatives markets in India to examine the brokers' assessment of market activity and their perception of the benefit and costs of derivative trading. The need for such a study was felt as previous studies relating to the imp act of derivative securities on the Indian stock market do not cover the perception of market participants who form an integral part of the functioning of derivative markets. Das, B., & Mohanty, S. (008), studied the behavior of the investors in the selection of investment vehicles. Empirically they found and concluded that different investment avenues do not provide the same level of satisfaction. Gupta.O.P (007) 4 in his study Impact of Introduction of Index Futures on Stock Market Volatility: The Indian Experience has been examined the potentiality of financial derivatives to alleviate problems connected with property investment. Survey of the existing literature indicates that so far no specific study has been carried on to examine the perception of retail investors towards derivatives market. Hence the present study is an attempt in this direction and therefore, aims to enrich the perception of retail investors towards derivatives market with reference to Visakhapatnam District.
INDIAN JOURNAL OF MANAGEMENT SCIENCE (IJMS) EISSN -79X ISSN 49-080 5 Method of Data Collection: Empirical research was conducted and the data was collected through survey. Questionnaire is constructed which consists of close ended questions. Sample size is (Traders trading at Visakhapatnam District). Convenient sampling method is employed. After an in depth review of literature, the statistical analysis were performed by using % analysis, standard deviation and Chi Square analysis. Progress of Derivative Markets: The derivatives market have grown manifold in the last two decades. India s experience with the equity derivatives market has been extremely positive. The derivatives turnover on the NSE has surpassed the equity market turnover. The turnover of derivatives on the NSE increased from,04.08 billion in 00-04 to,5,0.0 billion in 0- with an average daily trading value of 8.88 billion in 00-04 and increased to.8 billion in 0- which was about 0.58% greater than the previous year. Derivatives Users in India -Reference to Retail Investors: Derivative Retail investors have contributed 5.04% higher when comparing with institutional investment. Higher portion of funds where poured by retail investors. Thus this research was taken up to examine the perception of traders on futures and options trading with special reference to Visakhapatnam District. The purpose of this paper is to study on trader perception, motivating factors to invest in the options market, the risk level of the trader in respect to their age. Findings and Discussion of Data Analysis: Table - Percentage method Analysis.Age.Educational Qualifications.Gender 4. Monthly Income 5. Occupation. Sources of Income 7. Percentage of Investment 8. Preferred Derivatives Product Trading Under 5 5-5 5-45 45-55 Above 55 Total (4.) 4 (40) 7 (.7) (.7) Below SSC HSC Graduation PG Professional/ Technical Total 4 7 (.7) () (.7) Male Female - - - Total 58 - - - (9.7) Less than 0000 0000 0000 0000 To 0000 To 0000 To 40000 Above 40000 Total 5 9 (.7) (58.) (.7) Public Private Self Employed Business professional - 4 4 7 8 7 (40) (.7) (.7) Salary Business/ Profession Rent Agriculture Others Total 4 5 (8.) (.7) (.7) 0-5% -0% - 45% 4 - % Above % Total 8 Index & Stock F & O 8 (4.7) (5.) Commodities (8.) (8.) Swaps (0) Forex Derivatives 8 (0) Warrants & Others (.7) Total
INDIAN JOURNAL OF MANAGEMENT SCIENCE (IJMS) EISSN -79X ISSN 49-080 57 9. Sources of awareness 0. Source of money for trading. Experience in trading.factors motivates to invest. Frequency of trading 4. Sources of Stock Exchanges 5. Reasons for choosing particular Stock Exchange. Opinion about risk 7. Tools to overcome risk (Sources: Survey data) Media/Magazines 4 Surplus money 7 (.7) Friends/Relative (5.) Part of income (5.) Financial Advisors 5 (8.) Retained earnings (0) Stock Broker - Total 9 - Loans Others Total 5 (8.) 0 (.7) Less than year to year 4 to years 7 to 9 years Above 9 years Total (0) (5.7) 7 (8.) Return Liquidity Safety Low Risk Others Total 4 (5.7) 5 (0) Once in a month or - times in a - time a -5 times a - 0 times a less month week week week Total (.7) (.7) (0) 9 (0) NSE BSE NCDEX MCX Others Total 9 4 4 (5) (.7) (.7) More liquid market Transparent market Longer Better broker trading hours services Others Total (4.) 4 (.7) (.7) 4 0 Very High High Moderate Low Very Low Total 40 (.7) 4 (.7) By employing risk By avoiding diversification investment methods Panic selling Others - Total 8 (4.7) 4 (40) (0) Table represents the following findings using Percentage Analysis tool: -. It was found that 4.% of the respondents at the age between 5-5 years followed by 5-45 years with 40%. It was found that % of the respondents did their bachelor degree followed by Post Graduation with.%. It was found that most of them 9.7% are male respondents. 4. It was found that 58.% of the respondents are having Rs.0000-0000/- income. And.7% of the respondents are having Rs.0000-0000/- monthly income. 5. It was observed that 40% of respondents belongs to the category of public limited employees followed by.% private employees,.7% were self-employed,.% were doing their own business.. It was found that the highest percentage of income i.e. 8.% of total respondents from salary followed by 5% from business and profession. It can be noted that salaried personal and professionals are mostly willing to invest in derivatives. 7. It was found that maximum (5.%) of the respondents are invested 0% from their income in derivatives trading and 8. % of the respondents are invested % - 45% from their income in derivatives trading.
INDIAN JOURNAL OF MANAGEMENT SCIENCE (IJMS) EISSN -79X ISSN 49-080 58 8. 4.7 percent of respondents indicated that they use either options or futures, or both for managing portfolios on a regular basis. 0% of respondents close with forex derivatives and 8. percent respondents preferred commodities. 9. It was found that 5.% of the respondents are got introduced to derivatives market by friends and.% of the respondents are through media/magazines followed by 5% through their stock broker. 0. It was found that 5. percent of respondents prefer to invest in derivatives from their income and.7% of respondents from their surplus money.. It was found that most of them 5.7% are having 0 0 years experience in derivatives trading and 8.% of the respondents are having 04-0 years of experience.. It was found that most, 5.7 % of the respondents are motivated by the leverage i.e. rate of return in options market and 5% of the respondents motivated by liquidity.. More than half of the respondents i.e. 5. percent were infrequent traders they are trading the derivatives times of less in a month. 5 percent of respondents frequent by trading derivatives between to 5 times in a week. 4. It can be noticed that the majority of respondents i.e. 5% give first preference of source of stock exchange to trade derivatives is NSE followed by BSE with.% 5. 4. percent of respondents selected NSE because of more liquidity market and.% motivated by broker services followed by longer trading hours with.7%.. It was found that most of them.7% of the respondents opined that there is very high risk associated with trading of derivatives. 7. The study also reveals that 4.7 percent of respondents opined that it is better to avoid investment in risk areas, 40 percent of investors opined that the risk can be controlled by employing risk diversification methods suggested by analysts, brokers and friends or applying mathematical methods. A few respondents prefer panic selling to manage the risk. Portfolio of investment: The portfolio of financial investment of respondents with reference to their gender is given in table. The hypotheses formulated for this purpose were: (H 0 ): There is no significant relationship between the gender and portfolio of investment. (H ): There is significant relationship between the gender and portfolio of investment Level of significance α = 0.05 Table - Gender wise classification of Portfolio investment of Respondents Gender Derivatives Stock & Derivatives Derivatives & Derivatives Derivatives & Deposits Commodities & others Total Male 4 4 58 Female 0 0 0 0 Total 4 4 4 Table : Expected Values Gender Derivatives Stock & Derivatives & Derivatives & Derivatives & Derivatives Deposits Commodities others Male 4 4 Female
INDIAN JOURNAL OF MANAGEMENT SCIENCE (IJMS) EISSN -79X ISSN 49-080 59 Table 4: Chi-square test concerned with portfolio of Investment O i E i O i - E i (O i - E i ) (O i - E i ) / E i 0 0 0 4 4 0 0 0-0.0 0 0 0 4 4 0 0 0 0-0 - 0-0 - 5.0 The Table- represents the Observed frequency and Table- represents Expected Frequency and the table-4 represents their calculation. Calculated Value = 5.0. The Degree of freedom = (r-) (c-). That is (-) (5-). Therefore Degree of freedom is 4 and the Table Value = 9.488. It results to Calculated Value < Table Value (i.e.) 5.0 <.59 Since calculated value is less than table value we accepted the (H 0 ) and rejected alternative hypothesis (H ).So there is no significant relationship between the gender and category of investment. Problems of retail investors: There are many problems faced by the respondents while investing in derivatives. These problems are measured with the help of a four point scale and analyzed through F-ratio. The overall attitude towards the problem is also measured with the help of mean score and depicted in table-5. To test whether there exist any difference between different groups of derivative instrument investors about opinion on problems encountered in derivatives trading, the following hypotheses were formulated (H0): There is no significant difference between different groups of derivative instrument investors about opinion on problems encountered in derivatives trading. (H): There is significant difference between different groups of derivative instrument investors about opinion on problems encountered in derivatives trading. Table 5: Problems encountered regarding the derivatives trading Factor Mean Score F-Ratio Results.Transaction cost.09.75* Significant.Trading hours 0.8.0 Insignificant.liquidity 0.80.0 Insignificant 4.broker services..70* Significant 5.Clearing and settlement 0.9.97 Insignificant.Level of volatility.0.* Significant 7.Level of standardization 0.47.5 Insignificant 8.Level of regulation..7* Significant 9.Product availability 0.44. Insignificant 0.Impact of Recent Crisis.07.75* Significant.Risk Tolerance.07.7* Significant.Tax treatment 0.40.8 Insignificant Significant at 5 percent level The table reveals that majority of the respondents in all derivative product groups are of the view that the transaction cost, broker Services, level of volatility, level of regulation, impact of recent crisis and risk tolerance
INDIAN JOURNAL OF MANAGEMENT SCIENCE (IJMS) EISSN -79X ISSN 49-080 are high serious as their overall mean scores are.09,.,.0,.,.07 and.07 respectively translate to high serious. More over the comparative analysis between derivative product holders indicates that the f- value is significant at five percent level of significance in respect of the same factors since the calculated value is greater than table value i.e..0. Hence the opinion of institutional investors from different groups are different about the problems encountered by them towards derivatives trading. Degree of satisfaction of retail investors: The degree of satisfaction towards factors motivated for investment in derivatives are measured at four point scale. The various factors are analyzed and scrutinized as nine variables. The above said variables are rated on a four point scale namely highly satisfactory, satisfactory, moderately satisfactory and not satisfied which carry 4,,, marks respectively. The average score obtained by factors are presented in table. The variable rated as highly satisfactory are availability of Liquidity and Returns from investment since their mean scores and standard deviation are.7& 0.85,.49 & 0.79 respectively. According to the scale used to determine the satisfaction level of the means, these scores translate to a high satisfaction. The factors of Clearing and settlement of futures and Options transactions, Fairness of futures and options market, Market data for trading futures and options, Trade Limit and Broker Services as their mean scores are.78,.74,.8,.4 and.85 these scores translate to satisfactory. Table : Degree of satisfaction towards trading of derivatives products Factors Mean Score S.D Clearing and settlement of futures and Options transactions.78 0.55 Fairness of futures and options market.74 0.5 Market data for trading futures and options.8 0.54 Availability of Liquidity.7 0.85 Returns.49 0.79 Trade Limit.4 0.55 Broker Services.85 0.55 Margining Process. 0.5 Pricing of products.0 0.50 (Sources: Survey data) Suggestions: ) From the demographic factors it is found most of the investors are of age 5-5 and are mostly public employees, so the institutions dealing in derivatives products can take these factors and develop suitable marketing activities for them and attract them to invest more in derivatives markets. ) Also it is found that the friends and relatives are the most influential persons to pull the investors into the derivatives market. So the Institutions should develop some referral programs and rewards for referrals, so that the existing investors can actively bring in more number of investors. ) It is also found that the investors are investing up to 0% of their income on derivative instruments and also they said that the market risk is main parameters they look in to before investing. So the Institutions should develop products which are of less market risk and the credibility of the institution should be briefly explained to the investors. 4) Investors felt that high margin in derivative segment was the main barrier for investing, so the Institutions should work on this to reduce the margin. Conclusion: The derivatives have a history of attracting many bright, creative, well-educated people with an entrepreneurial attitude. They often energize others to create new businesses, new products and new employment opportunities, the benefit of which are immense. Finally, derivatives markets help to retail investors to increase their saving and investment in the long-run. Transfer of risk enables market participants to expand their volume of activity.
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