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Stock markets always play a crucial role in the growth and stability of a country's economy. The development of the stock market encourages capital accumulation, efficient use of resources and promotion of economic growth. The rise of stock market can increase opportunities for investment and expansion for industries, thus creating more jobs and increasing the purchasing capacity of the people. On the other hand, stock market crashes throughout history have caused economic slowdowns, recessions, unemployment, curbed consumer spending etc. In basic terms, when people choose to invest their savings into the stock market instead of keeping the money at home, the funds become an active part of the economy as they become available to industries for use in productive purposes. In Bangladesh, the total market capitalization or worth of all the companies listed on Dhaka Stock Exchange alone stands at an impressive $50 billion.
However, in Bangladesh experienced massive downturns in the stock exchange in 2010. The predominantly bullish market (characterized by large and powerful investors) turned bearish (characterized by loss of investor confidence and a consistent decline in the value of stocks). Millions of small investors lost millions in equity and it is popular belief that the whole incident was a scam and resulted from government negligence.
As such, the aim of this paper was to search for the factors that affect the buying behavior of investors and to see whether investor choices were grounded in fact or fiction. As such, the research was conducted on a sample of 80 investors covering different demographic avenues ranging from age, years of education, monthly income, marital status and some other characteristics. The research team identified 6 broad factors of investment choices further broken down into small variables of measurement.
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FACTORS AFFECTING INVESTMENT DECISIONS IN STOCK EXCHANGE
INTRODUCTION BACKGROUND 1 Definitions of Stock Market, Share, Derivative, Share 2 Role of stock market in the economy 3 History of the country’s stock market 4 Purpose of this research
INTRODUCTION PROBLEMS Companies’ need for external financing 1 2 Unutilized savings Stock Market bridge between the two 3
INTRODUCTION BROAD OBJECTIVE “ The objective of this research is to identify the factors affecting investment decisions in the stock exchange. ”
INTRODUCTION SPECIFIC OBJECTIVES Whether the profile of companies affects investment decisions Whether the financial performance of the companies affects investment decisions TO FIND OUT Whether the conditions of the market affects investment decisions Whether financial facilities and services affect investment decisions What extent different types of information affects investment decisions Whether the role of regulatory bodies affect investment decisions
INTRODUCTION HYPOTHESES “ To find out whether the profile of companies listed in the stock exchange affects investment decisions. ” Reputation of the board of directors of a company affects investment decisions is not average Reputation of a company affects investment decisions is not average Quality of the products or services offered affects investment decisions is not average Mean value of agreement with the belief that Size of a company affects investment decisions is not average A company’s number of years in operation affects investment decisions is not average Level of investment diversification affects investment decisions is not average
INTRODUCTION HYPOTHESES “ To find out whether the financial performance of the companies listed in the stock exchange affects investment decisions ” Past financial performance of a company affect investment decisions is not average Expected earnings from a company share affect investment decisions is not average Company’s dividend policy affect investment decisions is not average Mean value of agreement with the belief that Earnings of a company affect investment decisions is not average Price Movement of a company stock affect investment decisions is not average The level of risk associated with a company stock affect investment decisions is not average The current market price of a company affect investment decisions is not average.
INTRODUCTION HYPOTHESES “ To find out whether the conditions of the market affects ” investment decisions. Trends in the general price level affect investment decisions is not average Level of risk in the market affect investment decisions is not average. Mean value of agreement with the belief that The reliability of the market index affect investment decisions is not average The number of investors in the market affect investment decisions is not average The number of companies in the market affect investment decisions is not average
INTRODUCTION HYPOTHESES “ To find out whether financial facilities and services affect investment decisions ” The availability of margin loans from banks affect investment decisions is not average Mean value of agreement with the belief that Taxation policies on gain and/or loss affect investment decisions is not average The cost of borrowing funds affect investment decisions is not average The requisition period for withdrawal of funds from the market affect investment decisions is not average
INTRODUCTION HYPOTHESES “ To find out to what extent different types of information affects investment decisions. ” Recommendation from financial analysts/experts affects investment decisions is not average. Opinions of immediate family members affect investment decisions is not average. Recommendations of stock brokers affect investment decisions is not average. Mean value of agreement with the belief that Insider information on company affect investment decisions is not average. Recommendation from friends affect investment decisions is not average. Publicly available information affect investment decisions is not average. Gut feeling/ guesswork/ speculation affect investment decisions is not average.
INTRODUCTION HYPOTHESES “ To find out whether the role of regulatory bodies affect ” investment decisions Government holding shares in a company affect investment decisions is not average Mean value of agreement with the belief that Level of trust on the Securities and Exchange Commission (SEC) affects investment decisions is not average Efficiency of the SEC in correcting abnormal changes in the market affects investment decisions is not average
INTRODUCTION RATIONALE • Stock market related to economic growth • Stock market crashes of ‘96 and ’10 attributed to unsound investment decisions • Research looks at the factors that affect buying behavior • Aim is to identify which factors are currently being evaluated by investors • Bangladesh needs more research in this avenue • Findings can serve as platform for further research into other avenues
INTRODUCTION SCOPES & LIMITATIONS 1 This study is confined to the Dhaka Stock Exchange only 2 The sample only reflects investors in Dhaka City 3 Due to the slightly complex nature of the study, a limited sample has been taken 4 Due to time and resource constraints, stock performance could not be incorporated into the study
METHODOLOGY DATA COLLECTION 120 Survey questionnaires were sent out to different companies and acquaintances 80 Completed surveys were received
METHODOLOGY DATA COLLECTION PRIMARY DATA SECONDARY DATA • Questionnaire survey • Papers published in journals • Limitation of parameters in estimating investor perception • Textbooks (will be used as reference materials to understand and relate the relevant concepts our research findings) • Online investor guides and manuals and other sources of secondary data.
METHODOLOGY SAMPLING TYPE Convenient Sampling 1 Snowball Sampling 2
METHODOLOGY SAMPLE SIZE ?(????) ???+ ???? ?????? ????,? = Population (N) = 779,003 (list of affected investors from DSE) Proportion of investor whose perception is driven by speculation, p = 0.5 Proportion of investor whose perception is not driven by speculation, p = 0.5 Confidence Interval = 95% Critical Z score, Z = ±1.96 (for two-tailed test) Precision, d = 5% ?????? ????,? ???,???(?.???∗ ?.?? ∗ ?.??) ???,??? ∗ ?.???+ ?.???∗ ?.?? ∗ ?.?? = ⇒ ?????? ????,? = ??? *No. of people reached = 80 (actual sample size)
METHODOLOGY QUESTIONNAIRE DEVELOPMENT 1 Developed using 6 complex variables to measure buying behavior 2 Based on a 5-point LikertScale 3 Designed to record investors’ opinion on the factors 4 Designed with respondents’ convenience in mind: only tick based responses
METHODOLOGY VALIDITY AND RELIABILITY PRIMARY DATA SECONDARY DATA • High face validity • Reliability test conducted • Statements relate logically • Cronbach’sAlpha value 0.828 to the variables measured • Shows high reliability
METHODOLOGY PRE TESTING 1 10 surveys sent out to investors 2 Initial investor pool taken from immediate family and friends 3 Questionnaire was simple and easy to comprehend
METHODOLOGY DATA ANALYSIS • For the hypothesis testing, data was collected using Likertscale • We used T-tests to accept or reject the claims. We tested them to see if the mean was significantly above or below the average i.e. three • Simple analysis of mean and variance was carried out to rank the factors • All the tests concerning mean value of perception of a variable were done using t-tests. T-Critical value is 1.653 for 95% confidence interval and degree of freedom of 79. • We performed Factor Analysis • We have carried out a frequency analysis of our sample demographics (to see the overall characteristics of our sample: age, income, marital status) and of our responses
RESPONDENT DEMOGRAPHICS GENDER 72 8
RESPONDENT DEMOGRAPHICS AGE 42 22 13 3
RESPONDENT DEMOGRAPHICS EDUCATION LEVEL 37 25 7 5 2
RESPONDENT DEMOGRAPHICS INCOME 31 16 15 9 6 3
COMPANY INFORMATION The board of directors can be described as the face of the company and thus it is not surprising to see that 53.8% of the interviewees agree. . An even larger percentage (66.3%)has come to agree with the fact that the company in itself and its goodwill is what truly determines the stock’s worth and 68% believe size matters the most in terms of the company’s scale of business Variable Mean Std. Level of T-Calc. Conclusion Deviation Sig. Reputation of the company ( Mean: 3.8 ) Reputation of board ( Mean: 3.36) Size of the company ( 3.68) Reputation of board 3.36 1.150 0.00% 2.819 Reject Null Hypothesis Reputation of the company 3.80 1.277 0.00% 5.604 Reject Null Hypothesis Quality of the product or service 3.36 1.139 0.60% 2.847 Reject Null Hypothesis Size of the company 3.68 1.053 0.00% 5.735 Reject Null Hypothesis Years in operation 3.45 1.124 0.10% 3.581 Reject Null Hypothesis Investment Diversification 3.20 1.287 16.8% 1.390 Not Reject Null Hypothesis
FINANCIAL PEFORMANCE OF THE COMPANY Nothing says “great returns” than the financial performance of any given company and to start off in this path, most investors go for historical data analysis as they scourge through a company’s financial databank. Given to this point of view, 61%of the total sample agree that past financial performance is an important factor that affects their investment patterns and only a mere 1%is strongly against this idea . 49% believe expected earnings from company’s share is relevant. This is the CORE COMPLEX VARIABLE Variable Mean Std. Level of T-Calc. Conclusion Past financial performance ( Mean: 4.10) Expected earnings from share ( Mean: 3.65) Dividend policy ( Mean: 3.61) Earnings of a company ( Mean: 3.60) Deviation Sig. 4.10 1.051 0.00% 9.365 Reject Null Hypothesis Past financial performance 3.65 1.192 0.00% 4.878 Reject Null Hypothesis Expected earnings from share 3.61 1.142 0.00% 4.798 Reject Null Hypothesis Dividend policy 3.60 1.269 0.00% 4.229 Reject Null Hypothesis Earnings of a company 3.46 1.292 0.20% 3.202 Reject Null Hypothesis Price Movement 3.36 1.245 1.10% 2.604 Reject Null Hypothesis Level of risk 3.50 1.147 0.00% 3.898 Reject Null Hypothesis Current Market price
MARKET CONDITION Not considered to be an important factor by investors. Whatever the trend in the general price level, it will not have any impact on the stock price of the company an investor is investing into and thus only 35%agree to this being a factor. Although one of the most reliable form of indicator is often considered to be the market index, only 24%think it is of any value. . Same goes for the number of companies in the market where only a mere 21% think it is of any value. Variable Mean Std. Level of T-Calc. Conclusion Deviation Sig. For the market, the only factor that is considered to be of importance is the risk in the market ( Mean : 3.43). At a significance of 0.6% ( two-tailed) it is still not a very strong factor compared to many others but within this complex variable, it is the strongest 3.16 1.141 20.7% 1.274 Not Reject Null Hypothesis Trends in the general price 3.43 1.339 0.60% 2.840 Reject Null Hypothesis Risk in the market 2.82 1.163 18.0% -1.354 Not Reject Null Hypothesis Reliability of market index 3.08 1.077 53.5% 0.623 Not Reject Null Hypothesis Number of investors 2.76 0.997 3.60% -2.131 Reject Null Hypothesis Number of companies
ACCESS TO FINANCIAL FACILITIES AND SERVICES Be it the availability of loans ( Agree: 18%) , taxation policies( Agree: 28%) or the cost of borrowing (37%), compared to most other factors, they are not of significant relevance to the investment decision making process given the data set Variable Mean Std. Level of T-Calc. Conclusion In terms of taxation policies (Mean: 2.98), cost of borrowing funds (Mean: 3.21) and the length of the requisitions period (Mean: 3.20), investors are not too sure if they play any role at all or not Deviation Sig. 2.74 0.978 1.9% -2.402 Reject Null Hypothesis Loans from merchant banks 2.98 1.242 85.8% -0.180 Not Reject Null Hypothesis Taxation policies 3.21 1.328 15.6% 1.431 Not Reject Null Hypothesis Cost of borrowing funds 3.20 1.130 11.7% 1.584 Not Reject Null Hypothesis Requisition period
ROLE OF REGULATORY BODIES It is seen that only a mere 16%feel that whether or not the government has stock in any particular company they want to invest into will affect their investment decision whereas a staggering 56% do not perceive it to be a factor at all, which may very well be the case. As for the SEC and the level of trust that investors place in it, it is barley there which suggests investor’s distrust in the regulatory body as a whole. 30% think level of trust in the SEC is an important factor and an almost equal 31%believe the efficiency of the SEC is a factor Variable] Mean Std. Level of Sig. T-Calc. Conclusion Deviation 2.63 1.100 0.90% -2.685 Reject Null Hypothesis Government holding shares Trust on the SEC 2.96 1.214 71.3% -0.369 Not Reject Null Hypothesis 2.96 1.235 71.7% -3.63 Not Reject Null Hypothesis Efficiency of the SEC
TYPE OF INFORMATION AVAILABLE TO INVESTORS A lot of importance is place in the opinion of an expert as 42%agree to the fact that recommendation from a financial advisor is an important factor affecting the decision making process. However, the most important form of information is that from an insider, someone who knows the company inside-out and a staggering 52%believe so too. Variable Mean Std. Level of T-Calc. Conclusion Insider Information ( Mean: 3.84) Recommendation from analysts ( Mean: 3.45) Stock Broker ( Mean: 3.35) Public Information ( Mean: 3.21) Deviation Sig. Recommendation from analysts 3.45 1.03 0.00% 3.908 Reject Null Hypothesis Immediate family members 2.90 1.269 48.3% -.705 Not Reject Null Hypothesis Stock Broker 3.35 1.069 0.40% 2.93 Reject Null Hypothesis Insider Information 3.84 1.096 0.00% 6.835 Reject Null Hypothesis Recommendation from friends 2.98 1.031 82.9% -2.17 Not Reject Null Hypothesis Public Information 3.21 0.910 4.00% 2.089 Reject Null Hypothesis Guesswork 2.99 1.217 92.7% -.92 Cannot Reject Null Hypothesis
ADDITIONAL FINDINGS Factor Analysis: Through factor analysis we were able identify ten factors: 1. Market condition and company profile 2. Company Performance 3. Government and regulatory bodies 4. Expert opinion and investment environment 5. Quality of the product and taxation 6. Public Information and peer opinion 7. Intermediaries and fund withdrawal time period 8. Number of companies 9. Size of the company 10. Guess work and availability of margin loans
ADDITIONAL FINDINGS Factor 1: Market condition and company profile Variable Factor Loading .844 The level of risk associated with the company stock affects my investment decision .787 Price Movement of the company stock affects my investment decisions .773 Level of risk in the market is an important factor that affects my investment choices .759 Trends in the general price level affects my investment decisions .563 Earnings of the company plays an important role in my investment decision .532 The reliability of the market index affects my investment decisions .480 Reputation of the board of directors affects my investment decisions
ADDITIONAL FINDINGS Factor 2: Company Performance Variable Factor Loading .801 Past financial performance is an important factor that affects my investment decisions Reputation of the company affects my investment decisions .720 .678 Expected earnings from a company share is an important factor that affects my investment decisions .638 The number of years in operation of a company affects my investment decisions .619 The current market price of a company stock is an important determinant in my investment decision .534 A company’s dividend policy is an important factor that affects my investment decisions .397 To what extent does insider information on company stock affect which stocks to invest in
ADDITIONAL FINDINGS Factor 3: Government and regulatory bodies Variable Factor Loading .811 Whether the government has shares in a company plays a significant role in my investment decision .649 Level of trust on the Securities and Exchange Commission (SEC) is an important factor affecting investment decisions .629 How efficiently the SEC can correct abnormal changes in the market plays a significant role in how I invest in the stock market
ADDITIONAL FINDINGS Factor 4: Expert opinion and investment environment Variable Factor Loading The number of investors in the market is a factor that determines my investment decisions .756 To what extent does recommendation from financial analysts/experts affect your investment choices .669 The level of investment diversification of a company affects my investment decisions .557 The cost of borrowing funds has an impact on my investment decision .419
ADDITIONAL FINDINGS Factor 5: Quality of the product and taxation Variable Factor Loading Quality of the product or service offered by the company affects my investment decisions .676 Taxation policies on gain and/or loss is a major factor affecting investment decisions .666 To what degree do the opinions of immediate family members matter while making investment choices .477
ADDITIONAL FINDINGS Factor 6: Public Information and peer opinion Variable Factor Loading .759 To what extent does publicly available information on websites, gazettes etc. affect your investment choices .668 How do you rate the recommendation from friends in making investment choices
ADDITIONAL FINDINGS Factor 7: Intermediaries and fund withdrawal time period Variable Factor Loading To what extent do you take the recommendations of stock broker’s into account when making choice of investments .745 The requisition period for withdrawal of funds from the market has an impact on my investment choices .661
ADDITIONAL FINDINGS Factor 8: Number of companies Variable Factor Loading The number of companies in the market affects my investment decisions .676
ADDITIONAL FINDINGS Factor 9: Size of the company Variable Factor Loading Size of the company (scale of operations) affects my investment decisions .708
ADDITIONAL FINDINGS Factor 10: Guess work and availability of margin loans Variable Factor Loading To what degree does gut feeling/ guesswork/ speculation drive your choice of investment .716 The availability of margin loans from merchant banks plays an important role in determining my investment choice .490
ADDITIONAL FINDINGS Table: Total Variance Explained Component Rotation Sums of Squared Loadings From the table above we can see that 71% of the total variance is explained by the ten principal components. Total % of Variance 14.275 12.705 6.594 6.541 6.218 5.920 5.367 5.075 4.474 3.997 Cumulative % 14.275 26.980 33.574 40.115 46.333 52.253 57.620 62.695 67.169 71.166 Market condition and company profile Company Performance Government and regulatory bodies Expert opinion and investment environment Quality of the product and taxation Public Information and peer opinion Intermediaries and fund withdrawal time period Number of companies Size of the company Guess work and availability of margin loans 4.568 4.066 2.110 2.093 1.990 1.894 1.717 1.624 1.432 1.279 It should also be taken into account that around 47% of the variance is explained by the first five principal components.
ADDITIONAL FINDINGS Five major factors: Market condition and company profile Company Performance Government and regulatory bodies Expert opinion and investment environment Quality of the product and taxation
FINAL CONCLUSION LIST OF FACTORS IDENTIFIED Analysis of means Factor analysis Past Financial Performance (4.10) Insider Information (3.84) Company Reputation (3.68) Expected earnings from stock (3.65) Dividend Policy (3.61) Company earnings (3.60) Market Risk (3.46) Expert opinion (3.45) Reputation of Board of directors (3.36) Cost of borrowing funds (3.21) Level of risk of company stock (0.844) Price Movement of stock Market risk Past financial performance Company Reputation Expected earnings Insider information Level of trust on SEC • • • • • • • • • • • • • • • • • •