Retail Investors of North East in Securities Market Behaviour, Pattern of Investment and Profitability A Study of Jorhat Town

By: Rajesh Jaiswal Professor, Golaghat Commerce Golaght. Mr. Asst. College,

"Success in investing doesn't correlate with I.Q. once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." - Warren Buffett It's not your salary that makes you rich; it's your spending habits.- Charles A. Jaffe "If Calculus or Algebra were required to be a great investor, I'd have to go back to delivering newspapers." - Warren Buffett

(Indians prefer keeping 65 percent of their saving in liquid assets like bank, post office and cash , while 23 percent in physical investments like real estate and gold , only 12 percent in financial instruments. A survey found that only 0.9 of the Indian invests in equities directly. In North eastern region investment in securities or in stock market gained popularity only since last decade before that it was limited to only upto Guwahati City which is capital of our state and a commercial hub for seven north eastern states. As no such strong and reliable data bank available because research work in this area is lagging behind. Here we are trying to study the behaviour of the retail investors of Jorhat town through sample survey. These sample surveys is based on one hundred retail investors of Jorhat Town, are educated and belongs to middle class & upper middle class. It is a random sample survey conducted in the month of April 2009. The investors are selected from those who visited Depository participant and different Sub-Brokers of Jorhat Town. These data collected through the Questionnaire and personal interview and supplemented with secondary data from Internet, newspaper and Broking house records. The majority of the retail investors seems to be not aware of technical know how of the stock markets and the risks involved. Half of the active investors turn themselves as very active trader or day trader some of them are also associated with futures trading. ) INTRODUCTION

All of us want to create wealth. Also we want to create it fast and with ease. It is really very easy to do it. Also it does not require any great efforts and skills to create wealth. We just need to develop right habits. Initially when we start our career and earn our first income, we want to buy whole world from it. Soon we get married, we buy home, have our family, expenses keep adding up. Our income increase but so does our expenses. These are testing time for wealth creation. If we wait for next year, next increment, next bonus, next incentive to start saving it will never happen. The only thing that will happen is delay in wealth creation. Legendary investor and wealthiest man on earth Warren Buffet made his first investment when he was 11 years old and according to him he started late. Warren Buffest was millionaire by the time he was around 30 years old. That means we need to start save and invest as early as possible. Our spending habits also create hurdle in wealth creation. While prudent wealth creation philosophy is to follow P-I-P-E i.e. Prepone Investment, Postpone Expenses, we always Prepone Expenses and Postpone Investment. Rushing for Sale and purchasing our future requirement today is preponing expenses. Note that I am not against purchasing from sale. I am only suggesting do not buy something which you do not require immediately. Retailers are always keen that we prepone our purchases. This will help them earn their income early. However our focus should be to make efforts to prepone savings and investments. This will help us create wealth early. One of the best ways to create wealth in long term is through investment in equities. Since the enactment of the SEBI Act 1992 to till date the government of India made various reforms and develops the financial market and ensures adequate protection for Investors specially Retail (small) investors. Some of the developments like trading online, introduction of National Security Depository and Central Depository Services Limited are really open the doors for the investors who are living in small and semi urban areas to participate in capital market. Abolition of tax on dividend , reduction of long term capital gain and quota in allotment in initial public offering for small investors made equities investment lucrative and attractive as a result of this We witness multifold increased in number of investors in recent time. Table-1 Details of the Retail (Small) investor AGE Below 30 years 30 to 45 years 45 to 60 years 60 and above Education 18 42 30 10

HSLC Under Graduate Graduate Post Graduate Professional degree Holder Income (per month in Rs.) Less then 10000 Between 10000-25000 Between 25000-40000 40000 and above Employment Status Service (Private and Govt,) Business (self employed)

06 36 34 18 06

06 30 42 22

21 65 10

Professional (doctors, Lawers, Engineers etc.) Retired Table -2 03

1.

% Share of Stock Market Investments out of total financial assets Less then 10% Between 10% to 25% 45 40 15 21 42

2.

More then 25% Experience of the Stock market Less then 2 years Between 2 to 5 Years

3.

4.

5.

6.

7.

8.

9.

10.

11.

From 5 to 10 years 30 More then 10 years 07 Knowledge about promoters, EPS, financial position of Companies Known 22 Partly Known 42 Not Known 36 No of companies in portfolio (risk diversification) Less then 10 companies 22 10 to 20 companies 24 20 to 30 companies 38 30 and above companies 16 Reasons to buy a particular companys share Advice of Friends & relatives 30 Advice and Guidance of Broking House, Analysts 31 On the basis of price & price movement of share 22 Due to the brand image of the companies 15 With their own research on fundamental of co. 02 Invested in mutual funds, debts funds and ETF Yes 22 No 42 Sometime (occasionally) 16 No proper idea 20 How much % investment made through Primary market Less then 15% 64 Between 15% to 40% 24 Between 40% to 75 % 09 Between 75 % to 100 03 Exposure in Future & options or commodity trade Yes 08 No 66 No idea 26 Reasons for investing in Stock market Capital Gains in long term 40 Short term gain or making money 50 No clear idea 10 When you sale your share Sale at a target price 18 Sale at a Stop loss 10 When finance required 40 When share price go up 20 No experience of sale 12 Profit / losses from stock market Gained considerably 16 Gained Marginally 33 Lost some money 30 Incurred heavy loss (50% of capital) 21

Analysis and Interpretation of Findings As per our survey, majority of the investors are of middle aged and educated, half of the investors are graduate or with higher degree. These investors monthly income ranging between 10000 to 40000 and are from business (self employed) occupation. (Table-1). The level of education and the back ground of 60% of the investor is typical one their entry into the stock market is just to make money in hurry rather then informed one. 20% of the investors are higher middle class who are not so active and can be termed as long term investor. Upper middle class of our region witness active participation in the share market in recent years. Share of Stock-market investment in financial assets: Table reflects the share of equity investment in the total financial assets of investors such as bank /post office deposits, company deposits, insurances, govt/public sector bond, share, debenture, realty investment. The data shows that majority of respondents, 45% have invested less then 10% of their financial assets in the share market. 40% of the respondents invested 10% to 25% if their financial assets. Only 15% of the respondents invested more then 25% of their financial assets in the stock market. It shows that our investor are seems to be more cautious about taking the risk involved in the stock market. Experience in Stock market The data in the table indicates that majority of investors (i.e. 63%) are new investor with less then 5 years experiences, while 21% are of have less then two years experience. Only one third has five or more then five years of exposure in the stock markets. It should also be mention that only one forth of the investor have experience of both traditional mode of trading through different stock exchanges, and screen based on line trading. As over the last decade various reforms had taken place and the development in this area got momentum after 2001 in our region which attract and brought new investors to the stock market. Objective of Investing in stock Market Our survey shows that majority ,i.e. 50% of investors invests for short term gain or making money in hurry, 32% ,invests for long term capital gain, 8% for dividends, bonus etc. and 10%, have no clear idea. It means people have a vague idea that they can make more money in very short period in Stock market. 10% of the people who have no specific objective for investing is really wondering. when questions ask to some of the respondents about the reason for investing there answers were very casual , like my friend made good money from this market that is why I also invested , nowadays it is necessary to invest in stock market, all rich people are keeping their money in stock etc. It indicates that the majority of our investors have no proper knowledge of Personal Finance. Investment through other channels Mutual Fund: It is one of the best scientific ways of investing in stock market particularly for new or emerging investors but unfortunately it is no so popular among the investing community in our region. The data at a national level is also

not so encouraging. According to the India Household Investors Survey2008, majority of retail investors do not regard mutual fund equity scheme as a superior investment alternative to direct holding of equity shares. In India the penetration of mutual fund in the retail investor segment is still very low compare to US or other developed countries. ETF: ETF or Exchange Traded Fund is another way of entering in equities market in a safe way. ETFs are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular open-end mutual funds, ETFs can be bought and sold throughout the trading day like any stock. Debt Funds: A debt fund is a pool fund held by several investors in which the core holdings are fixed income investments The Debt fund (pooled group of investors) may invest in long term or even short term bonds, floating race debt, money market funds, or securitized products... The main objective of a debt fund is the preservation of capital and to generate income... The fees ratio for debt funds are usually smaller then equity funds (on average), because the overall management costs are lower. According to the findings of our sample survey majority of the investors are not invested through other channel like mutual fund, ETF, Debt fund etc. 20% of the investor are not known to these financial products. Only 22% invested in these products out of which majority are invested in mutual fund only. Basic Knowledge before making Investment decisions To judge the basic knowledge of investing we have asked many questions in questionnaire to our retail investors like Do you know the background of the Promoter of the company , in which you have invested?, Have you studied the financial reports of the company? , When you buy or sell your shares? Have you taken advice of a professional financial adviser before investing in stock market? etc. According to their answers we got some data which is given in table-2, which indicates that 78% of the respondents are either partly known or not known about the promoters of the companies in which they have invested. Majority of the investors have not studied the financial reports of the companies some of them have even not seen the reports as they think that it is not their job. When a question was asked that why they buy a particular companys share? Or what is the reason to buy particular shares? Answers given by the respondent was very surprising. Only 2% of the investor buys shares of a particular company after doing research or home work on the fundamental of company. 61% of the investors followed the advice of Friends, Relatives, Broking house and Analysts to buy a particular share. 37% of investors buy for price movement and brand image of the company. Regarding risk diversification only 20% are aware and apply it to their portfolio, rest of the investor either not known to the concept of diversification or not desire to learn about risk management (risk minimization). Data about the profitability shows that 16% of the investors gained considerably and 33% gained marginally and rest (51%) lost some money or lost even 50% of their capital.

We feel that before going for any kind of investment one should first try to find out the answer of three basic questions: How much do you need to save to meet all your financial goals? How should you allocate your savings across various products? How should your allocation change with age and circumstances? Our Suggestion or Precautionary measures for retail investor of our region After analyzing all the data we feel that though some of our retail investors made money from the stock market majority of the investor is in need of financial literacy. Our previous finance minister P. Chidambaram put it very straight, Financial literacy needs to be embedded in our way of life. Everyone who earns an income is a potential saver; every saver is a potential investor and every investor ought to be financially literate. We fill that our investors before going to investment in equities should do a little bit of research and try to gather some basic ideas of investment which is now easily available. Here we are trying to forward some suggestion which we think will help to our investor on the way of equity investment: * Higher Sales growth: Higher sales growth is a must look for every company. You should look at lest 25% sales growth for last three financial year. Only by selling its products and services a company can think of profit. * Dont put all your eggs in one basket: Think of this old saying and try to diversify your portfolio. There are two primary reasons to diversify your portfolio- one is to take maximum advantage of the market conditions and the other is to protect yourself against downturns. * Relaying too much on Tips is not advisable: Too much relying on tips or on even educated professionals in a public forum (like TV channels, internets etc) is another big error that people make. No expert can profess what every individual who is hearing the channel needs to follow. Beware of the glib helper who fills your head with fantasies while he fills his pockets with fees, warns Warren Buffett. * Look beyond price to find Value: The price of a stock is not the same as the value of the business. Always try to understand the value of the stock. Penny stocks (low price stock) trading at very low prices are often very expensive. * Make you investment with Patience and Discipline: The investors who put their money systematically, in the right shares and held on to their investments patiently can generate outstanding returns. Hence, it is prudent to have patience besides keeping a long-term broad picture in mind. Historically it has been witnessed that even a great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great Bull Run.

* Have realistic Expectation: Theres nothing wrong with hoping for the best from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. For instance, lots of stocks have generated more than 50 per cent returns during this recovery year. However, it doesnt mean that you should always expect the same kind of return from the stock markets. Therefore, when Warren Buffet says that earning more than 12 per cent in stock is pure dumb luck and you laugh at it, youre surely inviting trouble for yourself. * Set a loss limit and always stick to it: Dont get emotionally invested. Always set a personal loss-limit and sell if that limit is hit. It helps to translate the loss limit into the maximum-loss sessions. * Control on your fear and greed: Many investors have been losing money in stock markets due to their inability to control fear and greed. In a bull market, for instance, the lure of quick wealth is difficult to resist. Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time. This leads them to speculate, buy shares of unknown companies or create heavy positions in the futures segment without really understanding the risks involved. Instead of creating wealth, such investors thus burn their fingers very badly the moment the sentiment in the market reverses. In a bear market, on the other hand, investors panic and sell their shares at rock bottom prices, thus losing money again and again. * Avoid borrowing for investment: In no case borrowing is advisable for any kind of investment. Borrowing or any loan for equity markets can have disastrous consequences not just on your financial health but on your physical health.

Epilogue The findings of the survey made on the typical retail investor of Jorhat town shows that the level of involvement in the stock market is very high and their participation is demonstrated by active trading activity but diversification and risk management is not so encouraging. Equity is more popular then mutual fund, ETFs, debentures or debt. Investors have very less exposure in primary market compare to secondary market. New development in this market like online trading, investor friendly environment attracts new and young investors which is a very positive and healthy sing for emerging investment destination like north east. From findings we may conclude that retail investor of this region are emerging and looking forward for equity market compare to other traditional investment avenue but in need of financial literacy .

References: Reports of NCAER, How India earns, spends and saves, 2008 Economics times articles (govt. and industry should join hands to improve financial literacy), 31st july2007 Common mistakes committed in Equity Market, www.moneycontrol .com, 16th may2009 Official websites of BSE, NSE, SEBI, etc. Investor turn Trader The Hindu Business Line 24th March 27, 2009 Research Paper Retail Investor in Capital market by Dr. A. Lalitha, Osmania University