PROJECT REPORT

ON

A STUDY OF THE INVESTMENT BEHAVIOR OF INDIVIDUALS

INVESTING IN THE STOCK MARKET

Submitted in partial fulfillment of requirements for the award of the degree of

Masters of Business Administration (Finance)

SUBMITTED BY

Ridhi Gupta
(SAP ID- 77121913013)

NGASCE, NMIMS New Building, V.L. Mehta Road, Vile Parle West, Mumbai

Maharashtra – 400056

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 ACKNOWLEDGEMENT

I am using this opportunity to express my gratitude to all the people who helped me complete this
project. I am extremely grateful to them for their guidance and support throughout the entire
process.

First, I want to thank my Research Methodology professor, Ms. Anuja Shukla, who played a
crucial role in teaching us the essential principles of conducting research, which is the basis of this
entire project. Throughout this journey, she patiently solved all my queries and provided valuable
guidance, which helped me a lot in completing this project report on “THE INVESTMENT
BEHAVIOR OF INDIVIDUALS INVESTING IN THE STOCK MARKET.” Her support has
been valuable, and I am truly thankful to her.

Also, I would like to thank the Narsee Monjee Institute of Management Studies which allowed
me to do a study on the concerned topic.

Last but not least, I would also like to thank my friends and family for their support and
encouragement throughout the project, and a special thanks to all the respondents of my survey
who gave me relevant data to study and conclude on my findings about the research.

Ridhi Gupta

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 LIST OF TABLES & FIGURES

LIST OF TABLES

Table No. Title of the Table Page No.

3.1 Construct Reliability and Validity test 22

3.2 Discriminant Validity test 23

3.3 Multicollinearity test 23

4.1 Correlation analysis 31

4.2 Moderation Effect of Financial Literacy 32

4.3 Hypothesis Results 33

LIST OF FIGURES

Figure No. Title of the Figure Page No.

1.1 Monthly New Demat Accounts Added (in Lakhs) 5

3.1 Conceptual Model 18
4.1 Age 25
4.2 Qualifications 26
4.3 Occupation 27
4.4 Investment preferences of individuals 28
4.5 Investment Frequency 29
4.6 Investment decision 34
4.7 Reasons to Invest in the stock market 35
4.8 Years of investing in stock market 36
4.9 Preferred company type 37
4.1 Simplification of stock market 38

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 TABLE OF CONTENTS

EXECUTIVE SUMMARY.......................................................................................................... vi
CHAPTER – 1 ............................................................................................................................... 1
INTRODUCTION......................................................................................................................... 1
1.1 BACKGROUND OF THE STUDY ............................................................................................................. 1
1.1.1 HISTORY OF THE STOCK MARKET ................................................................................................. 1
1.1.2 HOW DOES THE STOCK MARKET WORK?..................................................................................... 2
1.1.3 THE CONCEPT OF INVESTMENT ................................................................................................... 3
1.1.4 THE CONCEPT OF RISK AND RETURN ........................................................................................... 3
1.1.5 GROWTH IN THE NO. OF INVESTORS ........................................................................................... 4
1.1.6 TYPES OF SECURITIES IN THE STOCK MARKET ............................................................................. 6
1.1.7 TYPES OF INVESTORS.................................................................................................................... 6
1.1.8 FACTORS IMPACTING THE INVESTMENT BEHAVIOR OF INDIVIDUALS ......................................... 7
1.2 RESEARCH PROBLEM ........................................................................................................................... 8
1.3 RESEARCH OBJECTIVES........................................................................................................................ 8
1.4 SCOPE & SIGNIFICANCE OF THE STUDY .............................................................................................. 9
CHAPTER – 2 ............................................................................................................................. 10
LITERATURE REVIEW ........................................................................................................... 10
2.1 INTRODUCTION ................................................................................................................................. 10
2.2 CONFIDENCE & OVERCONFIDENCE ................................................................................................... 11
2.3 RISK AVERSION .................................................................................................................................. 13
2.4 FINANCIAL LITERACY ......................................................................................................................... 14
2.5 RISKY INVESTMENT INTENTION ........................................................................................................ 15
CHAPTER – 3 ............................................................................................................................. 17
RESEARCH METHODOLOGY .............................................................................................. 17
4.1 RESEARCH PROBLEM ......................................................................................................................... 17
4.2 RESEARCH OBJECTIVES...................................................................................................................... 17
4.3 TYPE OF RESEARCH ........................................................................................................................... 17
4.3 CONCEPTUAL MODEL ........................................................................................................................ 17
4.4 HYPOTHESIS DEVELOPMENT ............................................................................................................. 18
4.5 SAMPLING STRATEGY ........................................................................................................................ 19

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 4.5.1 SAMPLING METHOD .................................................................................................................. 19
4.5.2 SAMPLE SIZE ............................................................................................................................... 19
4.6 DATA COLLECTION ............................................................................................................................. 20
4.6.1 TYPES OF DATA & SOURCES OF DATA COLLECTION .................................................................... 20
4.6.2 METHODS OF DATA COLLECTION ............................................................................................... 21
4.6.3 INSTRUMENT OF DATA COLLECTION .......................................................................................... 21
4.7 RELIABILITY, VALIDITY & MULTICOLLINEARITY TEST.......................................................................... 21
4.8 DATA ANALYSIS TECHNIQUES ............................................................................................................ 24
CHAPTER – 4 ............................................................................................................................. 25
DATA ANALYSIS ....................................................................................................................... 25
CHAPTER – 5 ............................................................................................................................. 39
FINDINGS, SUGGESTIONS & CONCLUSIONS.................................................................. 39
5.1 FINDINGS FROM THE STUDY ............................................................................................................. 39
5.2 LIMITATIONS OF THE STUDY.............................................................................................................. 40
5.3 SUGGESTIONS ................................................................................................................................... 40
5.4 CONCLUSION ..................................................................................................................................... 41
CHAPTER – 6 ............................................................................................................................. 42
BIBLIOGRAPHY ....................................................................................................................... 42
ANNEXURE ................................................................................................................................ 48

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 EXECUTIVE SUMMARY

In recent years, there is a significant growth in the number of investors investing in the stock
market, particularly after the Covid-19 pandemic. As per the reports, from May 2020 to September
2021, the brokerages had almost doubled up their new customers which are first-time investors out
of which approximately 70% are under 30 years of age. With such a significant growth in the
number of stock market investors, it becomes more important for the financial service providers
to understand the needs and behavior of those investing in the markets to give them better services
and products that suit their needs.

Purpose- The main aim of this study is to get insights into the investment behavior and preferences
of stock market investors to understand what type of investments are they interested in and for
what time period, how they make their investment decisions , their perception about the stock
market, etc. The study also aims to examine the role of individual factors – overconfidence, risk-
aversion, and financial literacy on the risky investment intention of an individual.

Research Design/ Methodology- To carry out the proposed descriptive research, the data is
collected through online survey from 72 individuals investing in the stock market. The sample
includes investors across all age groups, and diverse occupations; no particular class of investors
is focused more than others. The sampling method used in this study is a combination of random
and convenience sampling, which is chosen mainly due to time constraints. The data is primarily
collected through a well-structured questionnaire which was sent to the individual respondents
through various online modes like e-mail, WhatsApp, LinkedIn, etc. To support the primary data,
a lot of secondary data is also gathered from the internet like articles, journals, research papers,
news, videos, etc. The conceptual model used in the study (containing four constructs/ variables-
Overconfidence, Risk aversion, Financial Literacy, and Risky investment intentions) is taken from
Dinç Aydemir, S., & Aren, S. (2017) and Sukamulja, S., Meilita, A. Y. N., & Senoputri, D. (2019)
to test the following three hypothesis:

H1: There is a positive relationship between Overconfidence, and Risky Investment Intention.

H2: There is a negative relationship between Risk aversion, and Risky Investment Intention.

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H3: Financial literacy moderates the relationship between Risk aversion and Risky Investment
Intention.

The collected data is analyzed and tested using three software- MS Excel, Smart PLS, and SPSS.
Correlation analysis is used to test H1, and H2 whereas Multiple Regression Analysis is used to
test H3.

Findings and Conclusions- After doing an analysis of the collected data using the above-stated
data analysis’ software, it is found that some individuals tend to be overconfident about the
financial decisions they make, and it is found that overconfidence is positively related to risky
investment intentions among individuals. This is because their overconfidence makes them think
that they cannot make a wrong investment decision and cannot lose money even if they invest in
risky securities. As against this, there are risk-averse investors who avoid taking risks, and want
to be double sure before they purchase anything; these investors prefer earning low returns by
being on the safer side, and investing in safer securities rather than investing in highly volatile
securities for earning potentially higher returns. However, it was presumed that a financially
literate individual, despite being risk-averse, intends to have risky investment intentions but it is
found that financial knowledge does not change the risk-taking capabilities of an individual, it can
only make an individual invest wisely and rationally. Based on the above findings, H1 , and H2
are accepted whereas H3 is rejected.

Suggestions/Recommendations- With reference to the researched variables, although it is

researched that overconfidence is positively related to risky investment intentions of an individual,
however, it is suggested to expand the existing literature to explore whether such investors make
right or wrong financial decisions. Additionally, it is suggested to test the financial literacy level
of an individual before commenting on the effect that financial literacy has on the investment
behavior of stock market investors. Moreover, it is found that stock market as an investment
opportunity market is a less popular choice among homemakers in India, and many studies are
there suggesting homemakers to start investing due to multiple advantages, however, it should be
researched that what restricts them from participating in the markets, this will tap the problem from
its root cause. Thus, an effort should be made to expand the existing set of literature by researching
on the proposed topics.

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 CHAPTER – 1
INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Financial markets are marketplaces where buying and selling of financial instruments like stocks,
bonds, derivatives, etc. takes place. These markets help in mobilizing the funds from the people
who save money (like individuals, and households), to the government, or businesses who use this
money for productive purposes, contributing to the economy’s growth. The individuals or
households are commonly referred to as investors, and businesses are known as borrowers/ issuers.
The financial markets are further classified into many types of marketplaces based on the securities
they deal in, the period, etc. These are the stock market, bonds market, forex market, money
market, etc. One of these well-known and widely utilized marketplaces is the stock market.

The stock market is a type of financial market that primarily involves buying and selling shares of
public companies. However, other securities are also traded on the stock market. This includes
bonds, debentures, etc.

1.1.1 HISTORY OF THE STOCK MARKET

The world’s first stock exchange was established by the Dutch East Indian Company in
Amsterdam, Netherlands in the year 1602. During that time, the companies who used to trade
goods through cargo ships all over the world raised capital from the people in return for a share of
the profit earned through the trade of goods like gold, spices, etc. This was the beginning of the
stock market. After that, the London Stock Exchange was established in the year 1801, and the
New York Stock Exchange (NYSE), the world’s biggest stock exchange, was established in
America in the year 1817. Over time, the stock market started in other European countries like
Germany, etc.

In India, even before the establishment of the stock exchange, people used to sit under trees and
trade physical shares on Dalal Street, Mumbai. Official trading in the stock market began in India
when some brokers came together to form the “The Native Share and Stock Brokers’ Association”
in the year 1875 with each of the brokers contributing just Re.1. The association was later renamed
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Bombay Stock Exchange (BSE). Asia’s first stock exchange, BSE, was established in 1875 and
received permanent recognition in 1956 by the Government of India under the Securities Contracts
(Regulations) Act of 1956. On the other hand, India’s second popular stock exchange, NSE
(National Stock Exchange), was incorporated in the year 1992, and it was the first fully automated
electronic exchange with a nationwide presence. In the year 1992, NSE started its trading
operations through the "NEAT" (National Exchange for Automated Trading) software. To regulate
both these stock exchanges, a regulatory body called the Securities and Exchange Board of India
(SEBI) was established which got recognized in the year 1992.

Initially, there was physical trading of shares in BSE but due to increased manipulation of amounts
because of the physical movement of shares, traders started facing huge losses, resulting which
BSE had switched to an electronic trading system in the year 1995 developed by CMC Ltd. In
1995, BSE Online Trading (BOLT) had a capacity of 8 million orders per day.

Starting with the physical trading of shares, we are now trading them electronically with the use
of laptops, mobile, and the internet.

1.1.2 HOW DOES THE STOCK MARKET WORK?

To expand the business, a company needs more money, and in the absence of sufficient funds, it
chooses to raise capital from the public. The company offers its shares to the public in exchange
for the funds received, and finally, it launches its IPO (Initial Public Offering) publicly. An IPO
refers to the process of offering shares to the general public for the first time. This is the stage
where a company turns from being a private limited company to a public limited company. The
company offers its shares to the general public through the primary market of the stock exchange,
and the general public, commonly referred to as the investors, subscribes to the shares and buys
the shares. Investors can further trade these shares on the secondary market platform of the stock
exchange. The trading of shares takes place through the stock exchange. Stock Exchange is an
organization or place through which buying and selling securities like shares, bonds, debentures,
etc. take place. To buy or sell shares, an individual has to open a “Demat Account” which holds
the shares in an electronic format. Another account called a "Trading account" is used to trade
shares in the market. While investors cannot directly trade the shares themselves, there are certain
SEBI-authorized individuals, known as brokers, who help investors in trading the shares. The
investors place an order with their broker and specify the price at which they want to buy/ sell the

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shares. The minimum price at which a seller wants to sell a share is known as the ask price, and
the maximum price at which a buyer wants to buy the share is known as the bid price. The deal
will be completed by the broker (both buyer and seller side broker) when the prices matched.

The price of shares and other securities changes a lot and varies greatly over time. This depends
on the performance of the respective company, and the sentiments of the investors about the future
potential of the company. If an investor has shares in a particular company, say, ABC Ltd., and he
thinks that the future price will go down, he will immediately sell the share to prevent loss.
Similarly, another investor thinks that the price will rise, he will buy the share immediately at the
current low price to earn profit by selling it at a higher price in the future. Additionally, the concept
of the law of demand works here. If there is high demand for the shares of a particular company,
the prices of shares of that company will rise, and vice versa. This is how the stock market works.

1.1.3 THE CONCEPT OF INVESTMENT

Investment refers to the process of deploying funds to earn profits in the future. In the stock market,
investment refers to utilizing the money for purchasing various securities like shares, bonds,
debentures, etc. to earn profits over time. This can be either in the form of an increase in the value
of the security, or interest/ dividend received from the issuer or borrower. The individuals make
investments to achieve their financial goals over time. The financial goals of each individual are
different. Some of the financial goals can be saving for unforeseen emergencies, buying a home or
any other asset, education funding, starting a business, saving for retirement, etc.

1.1.4 THE CONCEPT OF RISK AND RETURN

In the stock market, risk and return always go together. Although they have opposite characteristics
to each other, there is generally a direct relationship between the two, i.e., the higher the risk, the
higher the potential return, and vice versa.

Return refers to the profit made on an investment. It can be either through a rise in the price of
shares, or a dividend received from the company. On the other hand, risk refers to the possibility
of losing money, or not earning the expected return on investment. There is always a risk associated
with the securities traded on the stock market, however, the degree of risk varies depending upon
the type of security, period of investment in the security, etc.

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However, to balance between the risk and return trade-off, it is advisable to diversify the portfolio
i.e., having a balance between the securities carrying a high risk, and the securities with no or
negligible risk so that the overall risk remains within the risk-taking capacity of the individual, and
he/she can achieve his/her financial goals.

1.1.5 GROWTH IN THE NO. OF INVESTORS

There has a significant growth in the number of stock market investors over the years. As per SEBI,
there were only 2.3 crore demat accounts in March 2010, and in the year 2021, it has reached 5.3
crores and much more growth is witnessed in the year 2022 due to an increase in financial literacy
among the general public. In the year 2020, the number of active demat accounts in India rose by
approximately 1.4 crores, which is higher than the previous three years. The main reason was the
covid pandemic as during that time, retail investors were looking for alternative options as a source
of income due to sudden layoffs. Also, there was a complete lockdown, so without having the
opportunity to go out, people had more time to research the performance of companies, the stock
market, and much more. In 2022, the number of demat account holders was 8.4 crores which rose
to 11 crores as of January 2023. As mentioned, demat accounts are required to trade in the stock
market, so, an increasing number of demat accounts indicate an increase in the number of stock
market investors. Until 2019, the stocks were sold more and bought less which shows a lack of
interest from investors in participating in the stock market. But in 2020, the purchase of securities
had shown a significant rise.

In recent years, especially since the covid pandemic, the brokerages have almost doubled their new
customers in which 70% of the new investors are first-time investors under 30 years of age.
Additionally, from May 2020 to September 2021, the BSE user base doubled to reach 8 crores of
users. According to a survey of 2 lakh people, while investing, most of the people focus on long-
term money growth, and not just tax savings, so people have started investing in stock markets,
and other investment avenues rather than just in tax-saving investment options. One of the reasons
is, an increase in financial literacy, especially during the covid pandemic.

As per SEBI, in January 2022, the two depositories (which are responsible for maintaining the
shares), NSDL (National Securities Depository Ltd.), and CDSL (Central Depositories Services
Ltd.) together opened 3.39 million new accounts to reach 83.98 million accounts. Moreover, from

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April 2021 to January 2022, 28.9 million new demat accounts were opened out of which CDSL
alone had opened 25.1 million new accounts.

(Source:[Link])

Figure 1.1 Monthly New Demat Accounts Added (in Lakhs)

The above figure shows the new demat accounts opened by the two depositories from February
2021 to January 2022. It can be seen that it is a nearly increasing trend. Additionally, from 2020
till March 2022, the number of individual demat accounts with NSDL had increased by 1.4 times,
and around 3.2 times with CDSL

During the mis 1990s, millions of investors had vanished from the financial markets, and for
decades, the number of investors was stuck at approximately 20 million investors, however, the
covid pandemic has changed these figures significantly as investors exploded the markets. As per
the SEBI Report of FY 2022, the investors in the markets are not just restricted to big cities now.
Also, no. of active demat accounts in India in FY 2022 was more than 1 crore.

According to information, some of the reasons for the growth in the number of investors in recent
years seem to be the absence of attractive alternative investment options, expected decent returns
from the stock market investments in equities, ease of doing investments, and account management
due to digital technology, increasing awareness among the general public about the financial
markets.

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Thus, there has been a significant rise in the number of investors in the stock market as shown by
the collected data.

1.1.6 TYPES OF SECURITIES IN THE STOCK MARKET

Based on the level of risk they hold, there can be two types of securities in the stock market:

❖ RISKY SECURITIES: These are securities that have a chance of losing money if
invested. It generally includes stocks of companies with high volatility, or start-up
companies as the value of these stocks can change and fluctuate significantly, and thus
there is a high possibility of losing money on such securities. However, the risk factor
associated with a security reduces with time i.e., long-term investments in stock of even
highly volatile companies may reduce the risk associated with the security to some extent.

❖ LESS RISKY OR RISK-FREE SECURITIES: There are securities in the stock market
that are considered risk-free or may have a negligible risk, and thus there is a minimal
chance of losing out money on such securities. It generally includes debt instruments like
bonds, debentures, etc. as they offer fixed income at pre-determined rates of interest. It also
includes stocks of blue-chip companies (established companies with a history of good
performance).

Both the above-mentioned types of securities are preferred by different investors based on their
risk appetite. Based on this, there are different types of investors in the stock market which are
discussed below.

1.1.7 TYPES OF INVESTORS

There are different criterions to classify the investors. One way is to classify them based on the
manner in which they invest money, another way is to classify them based on their risk appetites.
However, in general, the following types of investors are there in the stock market, or any financial
market-

❖ EDUCATED INVESTORS: The educated investors are those who are aware of the
investment process and the instruments available for investment. Such investors generally

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 keep themselves updated with the ongoing trends in the market. Additionally, such
investors make financial decisions very carefully after doing an analysis of the current
market trends, and the financial instruments which they tend to invest in.

❖ UNEDUCATED INVESTORS: Uneducated investors are those who are not aware of the
basics of investment. Such investors do not take their financial decisions themselves, rather
on the advice of their friends, relatives, and/or their financial advisor or broker.

❖ SHORT-TERM INVESTORS: These are investors who invest money for a short duration
in instrument/ securities which provide quick returns in less time. However, such securities
carry high risk, thus, it can be implied that short-term investors invest in risky alternatives.

❖ LONG-TERM INVESTORS: These investors are just opposite to the short-term

investors who keep their investments for a longer period. Since the risk factor decreases
with time, it can be implied that long-term investors have low risk profile. However, it must
be noted that such investors earn less returns as compared to the short-term investors.

❖ RISK AVERSE INVESTORS: Risk-averse investors are those who avoid taking risks,
and keep themselves away from investing in securities containing high risk. However,
similar to long-term investors, such investors miss opportunity to earn higher returns.

1.1.8 FACTORS IMPACTING THE INVESTMENT BEHAVIOR OF INDIVIDUALS

There are various factors on which the investment decisions of an individual are based. The most
important factors are-

❖ RISK TOLENCE OF THE INVESTOR: This is one of the most important factors
affecting the investment preferences of an individual. All financial instruments carry a risk,
ranging from a negligible risk to much higher level of risk. The choice of financial
instrument of an individual depends upon the amount of risk that he/she can assume.

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 ❖ CURRENT STATUS OF THE INVESTOR: The status of an individual such as his/her
disposable income, the number of dependents, etc. also influences his/her choice of
investments. The risk tolerance of an individual is also impacted by his/her status.

❖ EDUCATION ABOUT INVESTMENT: A financially literate person would be able to

better plan his/her investments. If he/she is unaware of the basics of investment, the
individual may end up making wrong investment decisions. Additionally, it may be
possible that he/she may miss out various opportunities due to the lack of knowledge.

❖ MARKET DYNAMICS: Market dynamics refer to the changing market conditions.

These dynamics significantly influences the investment choices of an individual. For
example- When the market is growing, an individual may prefer to invest in risky
securities, however, when the market is highly volatile, the low-risk profile investors will
become more cautious and will choose to invest in instruments carrying a low risk.

❖ TIME HORIZON: The period for which an investor wants to put his/her money into the
market affects the types of financial instrument they invest in. For example, if an individual
wants to invest for a short period, he/she will invest in securities that gives quick returns in
short duration carrying a significant amount of risk.

After understanding the complete background of the stock market, next, the problem which caused
the need to carry out this research on the stock market is discussed along with the objectives of the
study.

1.2 RESEARCH PROBLEM

The problem which caused the need to carry out this research study is “The individuals tend to
make wrong investment decisions in the want of high returns”.

1.3 RESEARCH OBJECTIVES

The main objectives of the study are-

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 ❖ To understand the investment behavior of individuals in the stock market.
❖ To know the impact of the proposed personality traits of individuals on their investment
intentions.

Additionally, the sub-objective of this study is-

❖ To know the current level of financial literacy among stock market investors.

1.4 SCOPE & SIGNIFICANCE OF THE STUDY

This study aims to understand the investment behavior of individuals, particularly in the stock
market. It focuses on researching the perception of investors by gathering information about their
financial literacy level, their risk appetite, their time horizon, their experience as an investor, and
much more. The study also aims to create a relation between the personal traits of an individual,
and their risk appetite. It aims to test how overconfidence, risk-aversion, and financial literacy
level affects the investment intentions of an individual in relation to the risk assumed. Thus, these
findings will make significant contribution to the existing literature, especially in terms of the
investment behavior based on the proposed personality traits.

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 CHAPTER – 2
LITERATURE REVIEW

2.1 INTRODUCTION
Investors' investment preferences cannot be solely explained by financial figures (Aren and
Hamamcı, 2021e). Initially, investors assess financial instruments as either good or bad, and then
they evaluate the perceived good ones as low risk and the perceived bad ones as high risk (Slovic
et al., 2004). However, the variables that influence these preferences cannot be learned from
market data (Bikhchandani and Sharma, 2001; Çelen and Kariv, 2004). Unknown and new
investment instruments can elicit fear or excitement among investors (Aren and Hamamcı, 2021e),
which can either attract them to own the instrument or push them away from it.

These emotional responses in financial markets can be exploited by different interest groups,
leading to negative consequences for individuals and society's economy (Aren and Hamamcı,
2021b). The investment decision-making process is influenced by various emotional and cognitive
factors, which vary from person to person (Kanagasabai and Aggarwal, 2019). Two risks
associated with unfamiliar and new investment instruments are performance risk (the asset not
meeting expected returns) and security risk (the asset's inability to fulfill obligations) (Rougier,
2019). Risk assessments depend on judgments about these instruments.

The desire to take financial risks and invest in risky instruments is shaped by both risk and trust
factors (Klein and Shtudiner, 2016). Investors are aware of the risks involved but have self-
confidence that those risks won't materialize. Confidence is the belief in one's knowledge and
abilities. As financial markets have become more accessible to individual investors with the
introduction of new products and services (Hizgilov and Silber, 2020), the importance of financial
literacy has emerged. Financial literacy encompasses attitudes, awareness, skills, knowledge, and
behavior related to finance (Kanagasabai and Aggarwal, 2019). While financial literacy helps in
understanding financial instruments, it can also lead to overconfidence and trust (Kawamura et al.,
2021), which do not guarantee making the right decisions (Lusardi and Mitchell, 2011, 2014;
Kawamura et al., 2021).

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As a result, financial behavior varies significantly based on risk preferences, trust, and confidence
levels, and objective and subjective levels of financial literacy (Mudzingiri et al., 2018).
Understanding the financial decision-making process and its determinants has been a subject of
interest for market participants, practitioners, and theorists over time. The frequent occurrence of
crises and bubbles since the 2000s has further increased interest in this process, resulting in
different explanations and theories (Aren et al., 2021).

Financial intermediaries and policymakers are also interested in financial behavior from
microeconomic (product demand) and macroeconomic (savings or investments) perspectives
(Aren, S., & Aydemir, S. D., 2015). Additionally, financial literacy has been a phenomenon of
interest, as it plays an important role in various financial behaviors (Bayer, Bernheim, & Scholz,
1996). However, its specific impact on risky investment intentions has received less attention, and
little effort has been made to examine the indirect effect of financial literacy as a moderator
variable on financial behavior (Aren, S., & Aydemir, S. D., 2015).

While risk-averse individuals are generally expected to avoid risky behavior, the relationship
between risk aversion and financial risk avoidance is not straightforward. Research has shown that
people's risk-taking tendencies vary across different situations, suggesting that risk preferences
depend on the specific context (Weber et al., 2002). However, we propose that financial literacy
can differentiate individuals who avoid risks in general but take financial risks, diverging from the
expected relationship (Aren, S., & Aydemir, S. D., 2015).

2.2 CONFIDENCE & OVERCONFIDENCE

Confidence refers to a person's positive emotions and belief in the positive outcome of their
decisions (Bayat et al., 2019; Campbell et al., 2004). It represents their self-assurance and trust in
themselves and their choices, expecting favorable outcomes related to their circumstances.
However, there is often a disparity between what individuals know (objective financial knowledge)
and what they believe they know (subjective financial knowledge) (Yao and Rabbani, 2021).
Beliefs play a crucial role in determining confidence levels (Rougier, 2019) and impact the process
of judging self-confidence (Bogdan et al., 2017). Overconfidence occurs when individuals
evaluate their knowledge and abilities as greater than they truly are (Glaser and Weber, 2007;
Deaves et al., 2009; Graham et al., 2009; Ludwig and Nafziger, 2011; Aren and Canikli, 2018b).

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These individuals tend to consider themselves above average and disregard the inherent
uncertainty in financial markets (Busenitz and Barney, 1997; Mota et al., 2015).

Confidence has been extensively studied in increased risk-taking behavior (Tajeddini and
Tajeddini, 2008; Marafon et al., 2018; Yao and Rabbani, 2021). However, its impact on financial
decisions extends beyond risk-taking alone. It plays a critical role in investment and savings
choices (Mudzingiri et al., 2018) and in the formation of stock and bond prices (Zhao, 2017).
Unrealistic self-confidence leads to a reluctance to seek financial advice (Yao and Rabbani, 2021)
and the tendency to overlook important signals in the decision-making process (Mudzingiri et al.,
2018). Thus, while the relationship between risk perception, risk tolerance, and risky investments
is acknowledged, the influence of confidence on this relationship should not be overlooked
(Marafon et al., 2018; Yao and Rabbani, 2021).

Overconfidence causes investors to overestimate their knowledge and underestimate the accuracy
of their predictions, as they believe they possess greater capabilities than they do (J.R. Nofsinger,
2005). It also influences investors' willingness to take risks. Rational investors aim to maximize
profits while minimizing risk (J.R. Nofsinger, 2005), but overconfidence can lead them to take
greater risks when making investment decisions. Overconfidence arises from a false belief that the
information available can be effectively utilized due to accurate analytical skills. However, this
belief is an illusion of knowledge and ability, often stemming from limited experience and
expertise in interpreting information (H.K. Baker and J.R. Nofsinger, 2002).

Shefrin (2005) classifies overconfidence into two categories: (1) overconfidence in ability, where
individuals tend to believe they are better than they are, and (2) overconfidence about knowledge,
where individuals think they know more than they do. This attitude does not necessarily imply
incompetence or indifference. The problem lies in the perception that one is more intelligent and
capable. Overconfident investors tend to dismiss information they receive because they
excessively trust their own beliefs. They become overly confident in their views and knowledge,
leading them to disregard other relevant information. Excessive confidence causes investors to
overestimate their knowledge, inflate perceived risks, and exaggerate their ability to control
outcomes (Sukamulja, S., Meilita, A. Y. N., & Senoputri, D., 2019).

12
2.3 RISK AVERSION
Risk aversion, which reflects the degree to which individuals generally avoid taking risks in their
lives, can influence their behaviors and choices. According to the theory of reasoned action (Ajzen
& Fishbein, 1977) and planned behavior (Ajzen, 1991), attitudes and subjective norms shape
behavior by influencing intentions. Risk aversion refers to the extent to which individuals are
unwilling to accept or undertake risks (Aren & Hammamci, 2020, 2021). Traditional finance
suggests that people are generally risk-averse, while behavioral economists argue that risk aversion
can change based on situations involving gains or losses (Czerwonka, 2019). However, Breuer,
Riesener & Salzmann (2014) argue that risk aversion tends to be stable as a personal trait.

In negative situations, risk aversion tends to increase, leading to reduced financial decision-making
such as saving and investing (Sakha, 2019). Similarly, as individuals become more risk-averse,
their demand for risky assets decreases (Gollier, 2002). Risk aversion significantly influences
people's participation in risky markets (Dimmock & Kouwenberg, 2010). During financial crises,
market shocks often contribute to increased risk aversion (Guiso, Sapienza & Zingales, 2018). For
example, Sakha (2019) found high levels of risk aversion during the 2008 crisis, but observed a
decrease in risk aversion as conditions improved in the following years. These changes were
influenced by micro and macro-shocks and the expectation of future conditions. Guiso, Sapienza
& Zingales (2018) also discovered an increase in risk aversion among financial investors after the
2008 crisis. Byder, Agudela & Arango (2019) examined the risk attitudes of mutual fund investors
in Colombia and found that women and self-employed individuals withdrew their investments
from risky assets faster than others after the crisis.

In simpler terms, risk aversion refers to how much individuals avoid taking risks in their lives.
This attitude affects their behavior and choices. People are generally seen as risk-averse, but their
level of risk aversion can change depending on the situation. In negative circumstances, risk
aversion tends to increase, resulting in less willingness to make financial decisions like saving or
investing. When individuals become more risk-averse, they are less likely to invest in risky assets.
During financial crises, market shocks can lead to higher levels of risk aversion. For example,
during the 2008 crisis, risk aversion was high but decreased as conditions improved. These changes
are influenced by various factors, including expectations for the future. After the 2008 crisis,

13
financial investors also became more risk-averse. In Colombia, women and self-employed
individuals withdrew their investments from risky assets faster than others after the crisis.

2.4 FINANCIAL LITERACY

Financial literacy encompasses knowledge, skills, attitudes, and behaviors that contribute to
making informed financial decisions (Kanagasabai and Aggarwal, 2019). It goes beyond mere
knowledge and includes understanding, attitude, behavior, skills, and confidence (Kanagasabai
and Aggarwal, 2019; Hizgilov and Silber, 2020). Financial literacy plays a crucial role in the
decision-making process (Jappelli and Padula, 2013; Fernandes et al., 2014; Aren and Aydemir,
2015; Raut, 2020; Zakiet al., 2020). However, having high financial literacy does not guarantee to
make the right decisions (Lusardi and Mitchell, 2011, 2014; Kawamura et al., 2021). Increasing
financial literacy can also lead to an overreliance on overconfidence and intuition (Kawamura et
al., 2021).

Financial literacy not only increases trust in the judiciary but also enhances risk perception
(Kanagasabai and Aggarwal, 2019; Mudzingiri and Koumba, 2021). There are two ways to
measure financial literacy: objective and subjective. Objective financial literacy refers to a person's
actual knowledge and skills, while subjective financial literacy pertains to an individual's
perception and evaluation of their knowledge (Xiao et al., 2015; Nejad and Javid, 2018). Although
these two are related, they have distinct characteristics and can have different effects on behavior
(Bellofatto et al., 2018; Xiao et al., 2015; Xiao and O'Neill, 2016; Xiao and Porto, 2017; Nejad
and Javid, 2018). Some studies have found that only subjective financial literacy increases risk-
taking, indicating an uncertain relationship between financial literacy and risk-taking (Aren and
Akgunes, 2019; Bannier and Neubert, 2016; Noviarini et al., 2021).

Financial literacy can be defined as an individual's understanding of fundamental financial

concepts and the functioning of financial markets (Servon and Kaestner, 2008). It enables people
to comprehend and utilize financial concepts in their decision-making (Mandell & Klein, 2009).
The importance of financial literacy has been highlighted due to market deregulation and social
security reforms worldwide, making individuals more active and responsible for their financial
planning (Van Rooij et al., 2011). However, research suggests that many individuals lack financial
literacy, which hinders their ability to make informed financial decisions (Guiso & Jappelli, 2008;

14
Al-Tamimi & Bin Kalli, 2009; Shahrabani, 2012). Limited financial knowledge also affects stock
market participation and risky investing (Van Rooij et al., 2011; Guiso & Jappelli, 2008).

According to Mandell and Klein (2007), better financial literacy leads to improved financial
behavior, and the Expectancy theory links perception to behavior. It's important to note that
financial literacy is distinct from a person's education level. A highly educated individual may lack
knowledge about essential financial concepts, while a less educated person may be more familiar
with financial issues (Akerlof and Shiller, 2010). The lack of basic financial knowledge, such as
compound interest, contributes to saving problems and insufficient average savings (Akerlof and
Shiller, 2010).

The significance of financial literacy has grown as individuals have become more involved in their
financial planning, particularly in the aftermath of the global financial crisis (Mandell and Klein,
2009; Robb and Woody).

2.5 RISKY INVESTMENT INTENTION

Attitudes and subjective norms have been found to influence the likelihood of engaging in risky
behavior according to Ajzen and Fishbein's theory of reasoned action (1977). Several studies, such
as those by Tuckett and Taffler (2008), Taffler and Tuckett (2010), and Eshraghi and Taffler (2012),
have established a connection between individuals' mental states and their risk-taking behavior.
These studies suggest that individuals’ observed risk-taking behavior may differ from their general
attitude towards risk-taking due to changing states of mind. Risk, as defined by Renn (1998), refers
to the possibility of an undesirable outcome. While risky situations involve known outcomes and
probabilities, uncertain situations only have known outcomes without known probabilities (Aren,
2018). Financial markets are characterized by uncertainty, which cannot be mathematically
calculated. Risk preference, according to Brockhaus (1982), represents an individual's inclination
towards taking risks in a specific context. Weber and Bottom (1990) propose that risk preference
reflects an individual's attraction or aversion to options perceived as riskier or less risky,
respectively. Researchers such as Pratt (1964) and Arrow (1965) have measured risk preference by
examining the proportion of an individual's wealth invested in risky assets using the asset
allocation approach. Lewellwn and Schalbaurn (1975) have also investigated individual risk
aversion by studying the proportion of their investments in risky assets. The decision to engage in

15
risk-taking or risk-avoidance behavior depends on an individual's risk perception, risk preferences,
and general risk knowledge (Albrecht et al., 2021). While it is typically assumed that risk
perception is negatively associated with risk-taking behavior, empirical findings are not
consistently supportive (Mills et al., 2008). Some studies have found a positive relationship, while
others report negative or no relationship (Brewer et al., 2007). This inconsistency could be due to
the influence of the consequences of previous risky choices on risk perception (Weber and
Milliman, 1997), or it may be attributed to differences in measurement methods (Mills et al., 2008).
Consequently, studies indicate that individuals do not consistently categorize themselves as risk-
takers or risk-averse (Weber and Milliman, 1997). Risky investments refer to those with uncertain
returns, where investors are unsure of potential gains or losses, and the act of purchasing such
instruments is regarded as an intention for risky investment (Aydemir and Aren, 2017). One's
perception influences their behavioral intention (Lim et al., 2018), and factors such as group
affiliation, personal values, social tendencies, and experience also play a role in risk assessment
(Renn, 1998; Sjoberg, 2000). Public perception even affects individual risk perception (Renn,
1998). Thus, when individuals must choose between an "unknown and new investment" or a
"known and individuals must choose between an "unknown and new investment" or a "known and
experienced investment," multiple risk variables impact this decision. Risk perception, risk
tolerance, risk-taking or risk-avoidance behavior, and intention for risky investments all contribute
to one's financial risk preferences.

Although enough research has been done on the proposed research topic but the findings of some
researchers are different from others, especially in relation to the role that financial literacy plays
in the risk profile of an individual. Thus, this study shall add to the existing set of knowledge about
the behavior of stock market investors.

16
 CHAPTER – 3
RESEARCH
METHODOLOGY

4.1 RESEARCH PROBLEM

The problem which caused the need to carry out this research study is “The individuals tend to
make wrong investment decisions in the want of high returns”.

4.2 RESEARCH OBJECTIVES

The main objectives of the study are-

❖ To understand the investment behavior of individuals in the stock market.

❖ To know the impact of the proposed personality traits of individuals on their investment
intentions.

Additionally, the sub-objective of this study is-

❖ To know the current level of financial literacy among stock market investors.

4.3 TYPE OF RESEARCH

The type of research carried out to study the above-mentioned objectives is DESCRIPTIVE
RESEARCH.

Descriptive research is a kind of research which is carried out to provide a detailed, and
comprehensive understanding of the proposed topic.

4.3 CONCEPTUAL MODEL

A conceptual model is a graphical presentation which shows how the different variables
(or constructs) used in the study are interrelated, and how they influence each other. It serves as

17
the basis for carrying out the proposed research study. It helps to conceptualize the research, and
is the basis for hypothesis development.

For the purpose of carrying out the research, the conceptual models developed, and used by Dinç
Aydemir, S., & Aren, S. (2017) and Sukamulja, S., Meilita, A. Y. N., & Senoputri, D. (2019) were
modified as follows-

OVERCONFIDENCE
RISKY-INVESTMENT
INTENTION

RISK-AVERSION

FINANCIAL LITERACY

Figure 3.1 Conceptual Model

4.4 HYPOTHESIS DEVELOPMENT

A hypothesis is a prediction signifying the relationship between two or more variables that need to
be tested before concluding. The conceptual model developed in Figure 2 is the basis of hypothesis
development.

As proposed by (J.R. Nofsinger, 2005) that overconfidence causes investors to overestimate their
knowledge and underestimate the accuracy of their predictions, as they believe they possess greater
capabilities than they do. Thus, it is hypothesized that-

H1: There is a positive relationship between Overconfidence, and Risky Investment Intention.

18
According to (Weber et al., 2002), while risk-averse individuals are generally expected to avoid
risky behavior, the relationship between risk aversion and financial risk avoidance is not
straightforward. Based on this, the following hypothesis was formulated-

H2: There is a negative relationship between Risk aversion, and Risky Investment Intention.

Additionally, it is proposed by some studies that financial literacy can change the original
relationship between risk-aversion, and risky investment intentions, however, some researchers
proposed that it cannot. Based on this finding, the third hypothesis was formulated for testing-

H3: Financial literacy moderates the relationship between Risk aversion and Risky Investment
Intention.

4.5 SAMPLING STRATEGY

Since it is not possible to collect the data from all the people (population) relating to the research
study, a sample is taken out of the whole population, and it is assumed that the study performed on
the sample will also hold on the population. A sample refers to a small portion of individuals taken
from the large population selected to study the given research problem.

4.5.1 SAMPLING METHOD

The sampling method refers to the process of selecting a sample from a large population. There
are various ways in which the sample for the study can be collected.
In this study, two methods of sampling are used:

❖ SIMPLE RANDOM SAMPLING: Through this type of sampling, the individuals are
randomly selected for the sample.
❖ CONVENIENCE SAMPLING: The sample is taken as per the convenience, and
availability of resources at the time of conducting the research.

4.5.2 SAMPLE SIZE

This study is based on the responses of 72 respondents. Therefore, the SAMPLE SIZE is 72. The
sample includes people from various age groups and diverse occupations. In simple words, no

19
particular class of people is taken for study; it is a mix of different types of individuals investing
in the stock market.

4.6 DATA COLLECTION

Data collection is one of the most important parts of the study. A study can be considered reliable
only if it is supported by appropriate data as it provides the foundation for analysis, interpretation,
and drawing meaningful conclusions for the research. The following is the process of data
collection carried out during the research.

4.6.1 TYPES OF DATA & SOURCES OF DATA COLLECTION

To carry out the research, a combination of the following two types of data is collected through
different sources of data collection:

❖ PRIMARY DATA: Primary data refers to the data which is collected firsthand while
conducting the research, and is collected particularly for current research study.
This study is primarily based on the primary data collected through first-hand information
gathering. The primary source of data used in the study is the general population or the
retail investors who invest in the stock market. The people were asked several questions
about their investment behavior, the financial instruments they invest in, their perception
of the stock market, investment preferences, etc. Thus, the conclusions of the study are
majorly drawn based on the first-hand information collected from retail investors.

❖ SECONDARY DATA: Secondary data refers to the data which is not collected during the
current research, rather, it was previously collected by someone else during their research
study.
In this study, the primary data collected from the people is supported by secondary data
collected from various sources like the research papers of the previous researchers who
studied the investment behavior, and investment preferences of individuals investing in
the stock market; their findings are also used in the study. Additionally, a lot of data is
gathered from published articles, blogs, magazines, books, videos, etc. on the internet.

20
4.6.2 METHODS OF DATA COLLECTION
Different methods of data collection are used to collect data from primary and secondary sources.

❖ To collect primary data, the survey method is used as this method allows to collect data
from a large population simultaneously. As already stated, the primary data is collected
from the retail investors investing in the stock market, so, the investment behavior of these
investors is understood through an online survey.
❖ To collect the secondary data from various sources, the method used was internet research,
and engaging in extensive reading of articles, studies, blogs, etc.

4.6.3 INSTRUMENT OF DATA COLLECTION

To study the investment behavior of stock market investors in general, and to test the above-stated
hypothesis, a Questionnaire was developed using Google Forms, and is used as the instrument for
collecting primary data. It was sent to the people through various online modes such as e-mail,
WhatsApp, LinkedIn, etc. The items in the Likert scale developed in the questionnaire are
originally developed by Dinç Aydemir, S., & Aren, S. (2017); Aren, S., & Hamamci, H. N. (2022);
Sukamulja, S., Meilita, A. Y. N., & Senoputri, D. (2019); Mazumdar, S. (2014) and are used to test
the hypothesis. However, all other questions are originally framed.

4.7 RELIABILITY, VALIDITY & MULTICOLLINEARITY TEST

Reliability, validity, and multicollinearity are important concepts in research methodology,
especially during quantitative research.

Reliability refers to the consistency of the data measurements. In simple words, the instruments
used to collect the data will produce consistent results over time. On the other hand, Validity refers
to the accuracy of the data. In simple words, it measures whether the data instruments measure
what they are required to. Data need to be reliable as well as valid for analysis.

Multicollinearity refers to the situation in which two or more variables used in the study are in one
line. In simple words, it means that the two variables are highly correlated. For getting accurate
results, multicollinearity should be absent. In simple words, the variables in the model should be

21
independent and should contribute unique information to the analysis; the items of one variable
should not be collinear to the items of another variable.
Before getting into data analysis, it is important to test the reliability, and validity of the construct,
as well as to ensure that multicollinearity must be absent. Thus, the following three tests were
performed in “Smart PLS” software.

CONSTRUCT RELIABILITY & VALIDITY TEST

The following test is performed to check the reliability and validity of data:

Cronbach's Composite Composite The average variance

alpha reliability (rho_a) reliability (rho_c) extracted (AVE)
F 0.844 0.929 0.902 0.754
O 0.89 0.898 0.905 0.624
RA 0.867 0.919 0.894 0.63
RI 0.929 0.968 0.954 0.874

Table 3.1 Construct Reliability and Validity test

Here, F: Financial Literacy O: Overconfidence RA: Risk Aversion RI: Risky-Investment Intention

Firstly, the construct reliability and validity test were performed on the collected data, and the
results are reported in Table 1. As evident from Table 1, Cronbach’s alpha values of all the variables
are greater than the threshold value of 0.7, which indicates that the data is reliable. Similarly,
composite reliability values are also accepted as they lie within the threshold value, i.e., between
0.7 and 0.95, except for risky investment intention. However, since it lies slightly above the
threshold value, therefore, it is taken as it is one of the main variables of the study. Additionally,
the Average Variance Extracted (AVE) of all the variables is above the threshold value of 0.5,
which indicates that the data is valid. Thus, the data collected is reliable, as well as valid.

22
 DISCRIMINANT VALIDITY TEST- FORNELL - LARCKER CRITERION

F O RA RI
F 0.868
O 0.704 0.79
RA 0.094 0.207 0.794
RI 0.438 0.365 -0.403 0.935

Table 3.2 Discriminant Validity test

The rule of thumb says that the diagonal (highlighted) values should be greater than any value on
the left. As can be seen from Table 2, the highlighted values are greater than all the values on the
left. Thus, it can be said that the validity is established.

MULTICOLLINEARITY TEST – VIF

VIF
F1 2.085
F2 2.403
F3 1.821
O1 2.411
O2 3.516
O3 1.549
O4 2.812
O5 4.576
O6 3.47
RA1 2.83
RA2 1.909
RA3 2.498
RA4 2.453
RI1 4.01
RI2 3.176
RI3 5.239

Table 3.3 Multicollinearity test

According to the rule, if the variance inflation factors i.e., the “VIF” value is less than 5, then
multicollinearity is not a problem. it can be seen from Table 3, the VIF value of all the variables is

23
less than 5 except for RI3, but since it is slightly greater than 5, therefore, it can be ignored. Thus,
no multicollinearity is detected.

4.8 DATA ANALYSIS TECHNIQUES

Once the data is collected, and the reliability, and validity tests are performed, the next step is to
analyze, and interpret the collected data to draw meaningful conclusions from it. In this study, the
data is analyzed using various techniques in MS Excel software. Most of the data is analyzed using
bar graphs, and pie charts. However, the hypothesis tested in the study is analyzed using
Correlation, and Regression analysis. H1 and H2, which tested the direction of the relationship
between the dependent and independent variables are analyzed through Correlation analysis. On
the other hand, H3 which tested the moderating effect of financial literacy between the two
variables is analyzed through the Multiple Regression analysis by presenting three different
regression models.

24
 CHAPTER – 4
DATA ANALYSIS

(1) Please select your age range

9.7%

22.2% 45.8%

22.2%

Below 18 years 18-25 years 26-34 years 35-44 years 45 years or more

Figure 4.1 Age

INTERPRETATION

Age is one of the most important demographic characteristics that gives information about the
respondents. Figure 2 describes the age of the respondents of the survey. Since the survey was
carried out specifically for the people who invest in the stock market, the above pie chart describes
the percentage of people in each group who invest in the stock market. As can be seen in the figure,
only 9.7% of the people of the age group 45 years or more choose to invest in stocks, however,
this percentage increases for the younger generations. It can be observed that approximately half
of the respondents in the sample of 72 people who invest in stocks belong to the age group 18-25

25
which indicates that the coming generations (Millennials, and Generation Z) are investing more in
stocks than the older generations (Generation X). The above statement can be supported by an
article published by NASDAQ which says that the younger generations are looking beyond
traditional investment options to grow their money, and have become more active in the financial
markets.

(2) What are your qualifications? Select the highest level of

qualification you have completed

4.2%
4.2%

25%

66.7%

High school Bachelor's degree Master's degree

Ph.D degree Professonal certification No formal qualifications

Figure 4.2 Qualifications

INTERPRETATION

Educational Qualification is another demographic characteristic that helps to know the knowledge,
and expertise of the people. We can observe in Figure 3 that the majority of respondents have
completed their bachelor’s degree. However, 4.2% of the people have no formal qualifications but

26
still they invest in the stock market. Thus, it can be said that educational qualification is different
from financial literacy or that the stock market does not demand formal qualifications to
participate, however, it is good to have formal educational qualifications. Additionally, the
individuals can gain stock market knowledge through stock market courses, and/or by actually
participating, and investing in the market.

(3) What is your occupation?

4.2%

12.5%
26.4%

56.9%

Student Employed Business/ Self-Employed Homemaker Others

Figure 4.3 Occupation

INTERPRETATION

The occupations of the respondents help to know about the class of people who are more engaged
in stocks. It can be observed that the majority of the investors are either students or employed. This
indicates that people who have a stable source of income, or who are still pursuing their education
are more interested in stocks than business-class people, and homemakers. This may or may not
suggest that employed individuals and students have a higher level of financial literacy than others.
There is a very small percentage of business-class people investing in stocks may be because the
27
sample taken includes small business owners rather than big corporates who, unlike small
businesses, are very active in stock markets. Additionally, only 4.2% of the homemakers invest in
stocks may be because of a lack of knowledge or lack of interest in the market, however, there is
no clear evidence found for the same during this research.

(4) Which investment categories do you participate in? Select all

that apply

120%
100%
100%
% of respondents

80%
60% 54.2%
45.8%
40%
16.7% 19.4%
20% 6.9%
0%
Shares Bonds/ Mutual Banks Real estate Others
Debentures Funds Deposits/
Savings
Account

Investment categories

Figure 4.4 Investment preferences of individuals

INTERPRETATION

Figure 5 shows all the investment instruments in which an individual puts his/her money. Since
the survey was conducted on stock market investors, 100% of the respondents invest in shares.
However, it can be seen in Figure 5 that a major portion of the stock market investors also invests
in Mutual funds, and Bank deposits. It means that the investors invest their funds in diversified
instruments ranging from volatile instruments like shares to the safest options like bank deposits.
Additionally, only 16.7% of the people are interested in bonds/debentures. This is because

28
debentures are a less popular financial instrument. Also, 6.9% of the people put their money into
real estate which is again a risky venture. After observing the individual responses of the
respondents, it was found that 100% of the individuals who invest in real estate are business
owners, no other class of people invest in real estate as per the data collected. Additionally, 19.4%
of respondents also invest in instruments other than those given in the questionnaire. More than
half of these respondents invest their money into gold, and local area ‘committees’, and only 1
respondent invest in cryptocurrencies. Thus, there are ample numbers of investment options
available, and most individuals today actively participate and put their money in diversified
instruments to reduce their overall risk.

(5) How often do you invest in the stock market?

9.7% 8.3%
20.8%

26.4% 33.3%

1.4%
Daily Weekly
Monthly Annually
Occasionally (as opportunities arise) I prefer long-term investments

Figure 4.5 Investment Frequency

29
INTERPRETATION

The investment frequency of people in the stock market will comment upon their investment
behavior, and how actively they participate in the market. As can be seen in Figure 6,
approximately 33% of the people invest monthly. Also, 26.4% of people do not have any fixed
time to invest, they invest as and when the opportunities arise. It simply means that this number of
investors participate majorly to take advantage of the potentially high returns on investments.
Additionally, only 1.4% of people invest annually. Similarly, approximately 18% of the people
invest either daily or weekly which indicates that they are highly engaged in the stock market.
Moreover, a significant number of people do long-term investments, i.e., once invested they do not
make frequent changes in their portfolio. These investors have a low-risk appetite as the risk factors
decrease with time. Thus, the data give mixed responses about the investment frequency of
individuals in the stock market.

(6) On the following scale, please select your investment behavior:

The above question was included in the questionnaire to test the hypothesis stated in the previous
chapter which are as follows:

H1: There is a positive relationship between Overconfidence, and Risky Investment Intention.

H2: There is a negative relationship between Risk aversion, and Risky Investment Intention.

H3: Financial literacy moderates the relationship between Risk aversion and Risky Investment
Intention.

Note: All the items of each variable are combined into a single variable data series by calculating
the Mean using the “IBM SPSS” software to carry out the Correlation, and Multiple Regression
Analyses.

To test the H1 and H2, the Correlation analysis was performed in “MS Excel”, and the results
are shown in Table 4.

30
 Items RA O RI

RA 1
O 0.251563 1

RI -0.53691 0.623958 1

Table 4.1 Correlation analysis

Here, O: Overconfidence RA: Risk Aversion RI: Risky-Investment Intention

INTERPRETATION

As can be seen from the results of the Correlation analysis in Table 4, the correlation between O
(Overconfidence), and RI (Risky-investment intention) is 0.6239 (approx.) which is a positive
integer, and, the relationship is significant as it is more than 0.5. Thus, it can be concluded that
overconfidence leads to risky investment intentions. In simple words, it means that if an individual
is overconfident about his/her abilities to make investment decisions in the stock market, the
individual will be intended to invest in risky securities. By being overconfident, the individual may
or may not make sound investment decisions.

Thus, Hypothesis 1 (H1) which states, “There is a positive relationship between Overconfidence
and Risky Investment Intention” can be accepted.

Similarly, the correlation between RA (Risk-aversion), and RI (Risky-investment intention) is

negative which signifies that there is a negative relationship between the two variables. In simple
words, it means that if an individual is risk-averse, he/she will not have a risky-investment
intention.

Thus, Hypothesis 2 (H2) which states, “There is a negative relationship between Risk-aversion
and Risky Investment Intention” can be accepted.

Hypothesis 3 is tested using Multiple Regression Analysis carried out in “MS Excel” software,
and the results are shown in Table 5.

31
 Standard
[Link]. coefficients T P-value R2 F Sign. F
Risk
1 aversion -0.356557377 -1.678358959 0.007427 0.413506927 2.816889 0.007427
Risk
2 aversion -0.414330296 -2.127496243 0.045391 0.400067243 4.501441 0.02361
Financial
Literacy 0.578426421 2.36587133 0.027683
Risk
3 aversion -0.524043242 -0.633017269 0.533894 0.300719184 2.866938 0.062258
Financial
Literacy 0.49412809 0.741717482 0.46688

RA* FL 0.033602242 0.136550554 0.892751

Table 4.2 Moderation Effect of Financial Literacy

INTERPRETATION

In Table 5, the moderating effect of Financial Literacy on the relationship between Risk-aversion,
and Risky investment intention is shown. Financial Literacy can be called a moderating variable
if it can change the original relationship between the dependent variable (Risky-investment
intention), and the independent variable (Risk-aversion). To test the moderating effect of financial
literacy, three regression models are made in Table 5. The first regression shows the relationship
between Risk aversion (independent variable), and Risky investment intention (dependent
variable). To check the significance of the calculated t-values, p-values (probability values) need
to be examined, and according to the rule, if it is less than 0.05, the independent variable is
significant for the model. In the first regression model, the p-value is 0.0074 (approx.) which is
less than the threshold value of 0.05, therefore, the independent variable is significant.
Additionally, the R2 values show how much variance in the dependent variable (here, RI) can be
explained by the independent variable (here, RA).

The second regression is made for three variables, i.e., Risk aversion (RA), Financial literacy (FL),
and Risky investment intention where RA and FL are treated as independent variables, and RI is

32
the dependent variable. Again, the p-value of the independent variables is significant as they are
less than 0.05.

Similarly, the third regression analysis is done to show the moderating effect by multiplying RA,
and FL, and the regression analysis model is made for four variables i.e., RA, FL, RA*FL, and RI
where the former three are independent variables, and latter is the dependent variable. However,
if we look at the p-value in this regression model, it is much greater than 0.05 which shows that
there is no moderating effect of financial literacy on the relationship between Risk aversion, and
Risky investment intention.

Thus, Hypothesis 3 (H3) which states, “Financial literacy moderates the relationship between Risk
aversion and Risky Investment Intention” is rejected.

FINAL RESULTS OF HYPOTHESIS TESTING:

Hypothesis Result Significance level

H1 Accepted 0.05
H2 Accepted 0.05
H3 Rejected 0.05

Table 4.3 Hypothesis Results

33
(7) How do you make your investment decisions while investing in
the stock market? Select all that apply

70% 62.5%
60%
% of respondents

50% 41.7%
40% 33.3%
29.2% 29.2%
30%
20%
10%
0%
I do my own I rely on the I rely on my I rely on I invest Others
analysis and tips gut and historical based on the
research circulating intuitions performance advice of my
in the and past stock
market trends broker/
financial
advisor

Figure 4.6 Investment decision

INTERPRETATION

The data regarding the investment decisions of individuals gives significant insights into the level
of financial literacy among individuals. The investors who do their analysis and research can be
called as financially literate, and almost 62.5% of the people carry out analysis before investing,
however, after evaluating individual responses, the majority of these respondents also invest based
on the tips circulating in the market, and/or on the advice of their financial advisor/ broker. Thus,
all the 62.5% of the respondents cannot be called highly financially literate as they do not do
investments solely on their analysis. Additionally, approximately 29.2% of people invest based on
the tips circulated in the market. Moreover, a significant percentage of investors rely on past trends
of securities, and 33.3% invest based on their guts and intuitions about the performance of a stock,
these investors can be called overconfident.

34
(8) Why do you invest in the stock market? Select all that apply

60% 54.2% 52.8%

% of respondents

50%
40%
29.2%
30% 25%
20% 16.7%

10% 5.6%
0%
As a I enjoy I have To diversify To take Others
secondary investing in specific my portfolio advantage
source of stocks financial of potential
income goals that I high return
want to on
achieve investment
Reason to invest

Figure 4.7 Reasons to Invest in the stock market

INTERPRETATION

The above question was asked to find out how people see the stock market. It can be observed
from Figure 8 that the majority of the people invest in stocks to get advantage of the potential high
returns on stocks, and they see it as a secondary source of income. Additionally, approximately
1/4th of the respondents participate because they enjoy investing in stocks, these types of investors
may be called gamblers, as they do it for their pleasure. People who do investments to achieve
their specific financial goals, say, retirement planning, education funding, marriage, etc. may be
called dedicated investors, however, it can be observed that there is only a small portion of people
who invest in the stock market as they have specific financial goals to achieve.

Similarly, 5.6% of the investors invest in the market for reasons other than those given in the
questionnaire. This comprises 4 respondents out of which 1 people invest in the stock market to
gain knowledge, individual response analysis revealed that this investor is a student. Additionally,

35
3 out of the 4 investors participate because their family and/or friends told them to do so, thus,
some investors invest to try their luck on the recommendation of others.

(9) From how many years are you investing in the stock market?

12.5%

33.3%
12.5%

41.7%

Less than 1 year 1-3 years 3-5 years 5-10 years More than 10 years

Figure 4.8 Years of investing in the stock market

INTERPRETATION

It can be seen in Figure 9 that the majority of the investors are investing for 1-3 years followed by
33.3% of the investors investing for less than a year. The rest 1/4th of the investors is investing for
a long period now. More than 40% of the investors have started investing in the past 1-3 years, i.e.,
during or after the Covid pandemic. As already stated in the introduction of the research, Covid-
19 has had a significant impact resulting in the growth of no. of investors investing in stock
markets. There are various reasons for this, which are already stated in the introduction such as the
individuals having more time to research due the to complete shutdown, people were trying to find
a secondary source of income as many were already losing their jobs, etc.

36
(10) What is your most preferred type of company to invest in?

20.8%
31.9%

9.7%

9.7%
27.8%

Blue chip companies Start-up companies

Growth companies Dividend-paying companies
No specific preference

Figure 4.9 Preferred company type

INTERPRETATION

The data for the above question also gives valuable insights into the preferences of investors in the
stock market. The above pie chart in Figure 10 represents that majority of the investors prefer to
deploy money into blue-chip companies i.e., financially stable companies and also have a history
of great performance over the years. Such investors may be called risk-averse. Additionally, 27.8%
of people want to park their money into growth companies, i.e., the companies which they believe
will grow soon, these investors generally buy the securities at low prices to sell them at higher
prices in the future because they purchase securities with the belief that the share price will rise in
the future. Other than that, 20.8% of investors do not have any specific preference, they invest as
they see the opportunity. Additionally, there is only a small number of investors who invests in
start-ups; thus, these investors may be called highly risk-taking investors who can assume risk in
the want of higher returns. Lastly, 9.7% of the investors prefer to invest in dividend-paying
companies. The investors who have such preferences are those who invest for a longer period.

37
(11) Do you think the stock market should be simplified for the
general population to invest?

16.7%
4.2%

79.2%

Yes No Maybe

Figure 4.10 Simplification of stock market

INTERPRETATION

The above question was asked to take the general opinion of the public regarding whether or not
the stock market should be simplified so that the general public can understand it more
appropriately, and can take their own investment decisions. As can be seen in Figure 11, the
majority of the people are in favor of simplifying the stock market processes, and practices.

38
 CHAPTER – 5
FINDINGS, SUGGESTIONS
& CONCLUSIONS

5.1 FINDINGS FROM THE STUDY

First and foremost, there is a significant growth in the no. of investors in stock market, especially
after the Covid pandemic. Moreover, it is found from the study that the younger generation i.e.,
Generation Y, and Z are looking beyond the traditional investment options, and therefore, an
increasing number of younger generations are putting their money into stocks. This implies that
the coming generations are willing to take risks unlike the older generations. An increase in the
number of stock market investors indicates that the financial literacy is increasing in India, and
people are taking advantages of various financial instruments available. However, despite a
significant increase in the number of investors, recent studies reveal that only 3% of the Indian
households are investing in stocks (Source- [Link]
of-indian-population-investing-in-stock-market/).

Another factor which highlights that financial literacy is increasing is that majority of the people
who invest in stock market understand the volatile nature of the market, and make rational
decisions by diversifying their portfolio into other less-risky financial instruments. However, it
was observed during the research that a very less percentage of India housewives are interested in
markets. Moreover, it is found that people see stock market as only a secondary source of income
to gain potential high returns.

Lastly, the results of hypothesis testing states that an overconfident individual usually has risky
investment intentions unlike the risk-averse investors who has a negative relationship with risky
investment intentions. Also, it was presumed that financial literacy may change the relationship
between risk-aversion and risky intentions which means that a financially literate individual
despite being risk-averse, may choose to invest in risky securities, however, the data did not
support the hypothesis, and it was rejected.

39
5.2 LIMITATIONS OF THE STUDY
Although this study gives valuable insights into the investment behavior of stock market investors,
however, there are certain limitations that should be taken into account for a comprehensive
understanding of the study’s outcomes. The limitations are:

❖ The major limitation of the study is that of the sample size taken is too small. The data is
collected only from 72 individuals, all of which belong to the same geographical area, New
Delhi. Hence, the findings of the study may or may not be generalizable globally.
❖ Additionally, the sample is selected through random, and convenience sampling method,
so, the selected sample may be biased, or may not reflect a true picture of the retail investors
in general.
❖ Another major limitation is that questionnaire is used as the only instrument for collecting
data.
❖ Lastly, it may happen that some individuals may not have given correct responses. In such
a case, the whole purpose of the study will be distorted.

5.3 SUGGESTIONS
Based on the findings and limitations of this research study, some of the suggestions are given for
further research that will improve, and enhance the scope of studies on stock market investors.

❖ As observed, the homemakers constitute only a negligible portion among stock market
investors. Thus, comprehensive research should be conducted on the factors responsible
for the same, and what factors can motivate the homemakers to start participating in
markets.
❖ Although enough research has been done on overconfidence, and risky investment
intentions of an individual, this area of study should be expanded to include the
consequences of investing in risky securities as a result of overconfidence. In simple
words, it should be researched that whether individuals make wrong financial decisions or
right financial decisions by being overconfident.
❖ Additionally, more research needs to be done on a larger sample to study the impact of
financial literacy on the risk profile of an individual because as already stated, this study

40
 is based only on 72 respondents, thus, the results cannot be generalizable until further
proven.
❖ Also, financial literacy of an individual should be actually tested, rather than asked, to get
more accurate results about the impact of financial literacy on the risk behavior of
investors.
❖ Last but not the least, there are many other personality traits other than those proposed in
the study on which the risk-based investment intentions of an individual can be based.
Thus, further research should be done on those traits.

5.4 CONCLUSION
Many of the findings of the previous researchers also hold true for this study. As proposed by (J.R.
Nofsinger, 2005), overconfidence can lead them to take greater risks when making investment
decisions, the hypothesis testing proved that overconfidence leads to risky investment intentions.
Thus, it can be concluded there are a type of investors who act overconfident, and end up investing
in risky securities. In relation to financial literacy, as can be observed from the hypothesis testing
that at the significance level of 0.05, financial literacy does not moderate the relationship between
risk-aversion, and risky investment intentions of an individual. Thus, it can be concluded that
financial literacy may influence the investment behavior of individuals like a financially literate
person will invest very cautiously after carrying out enough analysis, however, his/her knowledge
may not be able to change his/her risk profile as risk appetite of an individual is based on many
factors like current financial status, no. of dependents, etc.

41
 CHAPTER – 6
BIBLIOGRAPHY

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BOOKS:
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[Link]
markets/[Link]

[Link]
directly-investing-in-equities-survey/articleshow/[Link]

[Link]
market/

[Link]
[Link]

[Link]

[Link]

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47
 ANNEXURE

QUESTIONNAIRE

Q1. Please select your age range

 Below 18 years

 18-25 years

 26-34 years

 35-44 years

 45 years or more

Q2. What are your qualifications? Select the highest level of qualification you have
completed

 High School

 Bachelor’s degree

 Master’s degree

 PhD degree

 Professional certification

 No formal qualifications

Q3. What is your occupation?

 Student

 Employed

 Business/ Self-employed

 Homemakers

48
 Others, please specify ________

Q4. Which investment categories do you participate in? Select all that apply

☐ Shares

☐ Bonds/ Debentures

☐ Mutual Funds

☐ Banks deposits/ Savings account

☐ Real estate

☐ Others, please specify ________

Q5. How often do you invest in stock market?

 Daily

 Weekly

 Monthly

 Annually

 Occasionally (as opportunities arise)

 I prefer long-term investments

Q6. On the following scale, please select your investment behavior:

1 specifies least satisfied with the statement, 5 specifies completely satisfied with the statement

49
 1 2 3 4 5

I have knowledge of
    
financial concepts

I have the ability to

communicate about     
financial concepts

I have the skills in making

appropriate financial     
decisions

I feel very confident with

    
my investment options

In making investment
decisions, I tend to base
    
myself on the initial
information I get

I believe that when I make

profit in investing, the
    
achievements are due to
my own ability

If I have a month to
research, I can choose the
most profitable     
investment instrument for
the next month

I have the necessary skills

to make good financial     
investments

I know the resources I will

refer to, to make good     
financial decisions

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 I have no desire to take
unnecessary chances on     
things

I would rather be safe than

    
sorry

I want to be sure before I

    
purchase anything

I avoid risky things     

While making investment

decisions, I generally     
prefer risky alternatives

My willingness to buy
    
risky investments is high

I think investing in risky

stocks can give good     
rewards

Q7. How do you make your investment decisions while investing in stock market?
Select all that apply

☐ I do my own analysis and research

☐ I rely on the tips circulating in the market

☐ I rely on my guts and intuitions

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☐ I rely on historical performance and past trends

☐ I invest based on the advice of my stock broker/ financial advisor

☐ Others, please specify ________

Q8. Why do you prefer to invest in stock market? Select all that apply

☐ As a secondary source of income

☐ I enjoy investing in stocks

☐ I have specific financial goals that I want to achieve

☐ To diversify my portfolio

☐ To take advantage of potential high returns on investment

☐ Others, please specify ________

Q9. From how many years are you investing in stock market?

 Less than 1 year

 1-3 years

 3-5 years

 5-10 years

 More than 10 years

Q10. What is your most preferred type of company to invest in?

 Blue chip companies (established firms having a history of consistent performance)

 Start-up companies

 Growth companies (companies that have a potential to grow)

 Dividend-paying companies

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 No specific preference

Q11. Do you think stock market should be simplified for the general population to
invest?

 Yes

 No

Maybe

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