Chapter I Introduction

CHAPTER I

INTRODUCTION
In today’s modern and complex era of the financial world, investors are flooded with a wide
variety of choices that encourage them to invest in various avenues and make hefty returns in
return for undertaking some amount of risk. The decision making process of the individual is not
only based upon the rationality i.e. making maximum taking while taking minimum amount of
risk but certainly there are other factors that take shape the investor behavior and attitude. With
the changing times and landscapes of the financial world, the investors are faced with a wide
variety of choices when it comes to investing. Various new avenues are coming up day by day
thereby exposing the investors to a wide array of risk as they have never been exposed before.
This calls for careful scrutiny and selection of investment basket so as to be judicial while
making gains. Thus, with growing uncertainty and ambiguity investors need to be extra cautious
while making a choice between various investment avenues and trade off the risks with the
benefits provided by them.

Today in our highly diversified portfolio in the financial sector, it is necessary to identify a
common trend and pattern that binds many individual investors together either in terms of
objectives of investment or risk perception etc. The strategies of one investor differ from other
investors in many ways.

The option whether to trade or to hold the portfolio also depends upon the age of the investor.
There is always a dilemma for the novice investors whether to trade or invest. Hence every
individual investor has differing investment goals, risk tolerance levels, cash inflows and
outflows etc., according to which their optimal investment portfolio changes accordingly through
calculated steps and procedures. They are highly influenced by emotional and cognitive biases
which then reflect in the prices of securities leading to sub-optimal decisions at the individual
level and market anomalies and inefficiencies in the market.

Therefore this study aims at identifying suitable trading strategy for budding investors and to
determine the factors influencing investment decision of short term and long term investors.
Mainly this chapter deals with the concepts related to study, the importance and limitations
pertaining to it. It also contains the profile of the company where the project is carried out.

A study on the investment behavior of investors with respect to SHCIL 1

Chapter I Introduction

1.1 Conceptual and theoretical foundations

1. Investment

Investment can be defined in many ways. According to World Finance, investment refers
to the buying of a financial product or any valued item with the anticipation that positive returns will be
received in the future.

2. Investment Strategy
As defined in www.businessdictionary.com, investment strategy is a systematic plan to
allocate investable assets among investment choices such as bonds, certificates of deposit,
commodities, real estate, stocks (shares). These plans take into account factors such as economic
trends, inflation, and interest rates. Other factors include the investor's age, risk tolerance level,
and short- or long-term growth objectives.

3. Investment behavior

Investment behaviors can be defined as how the investors judge, predict, analyze and
review the procedures for decision making, which includes investment psychology, information
gathering, defining and understanding, research and analysis. The whole process is “Investment
Behavior” (Slovic, 1972; Alfredo and Vicente, 2010)

4. Trading of Equity

Trading of equity shares means buying and selling of equity shares in the secondary
market with the goal of generating returns that outperform buy-and-hold investing.While
investors may obtain 10%-15% annual return, traders might seek a 10% return each month.

5. Long term investment

Long term investment involves the purchase of assets with the intent of holding them for
the long term. In stock market, it is holding the portfolio of shares for long periods without
trading (selling). It is exact opposite of trading.

A study on the investment behavior of investors with respect to SHCIL 2

Chapter I Introduction

1.2 Concepts inclining with the study

1. Stock Exchange
Stock exchange is an organized and regulated financial market where securities such as
bonds, notes, shares are bought and sold at prices governed by the forces of demand and supply.
It is divided into primary market and secondary market. The major stock exchanges in India are
National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

2. Equity

Equity is the value of assets less the value of all liabilities on that asset. Shareholder's
equity represents the equity of a company as divided amongst individual shareholders. The
equity shareholders are known as the owners of the company. The equity shareholders have the
right to vote in Annual General meeting (AGM) of the company.

3. IPO
An Initial Public offer (IPO) is the selling of securities to the public in the primary
market. It is when an unlisted company makes either a fresh issue of securities or an offer for
sale of its existing securities or both for the first time to the public. It can be used to raise capital
for the company.

4. Dividend
Technically, dividend is an appropriation of a company’s profit to its shareholders. It
can be issued as cash payments, shares of stock or other property. It is decided by the Board of
Directors at the Annual General Meeting (AGM).

5. Liquidity
Liquidity is the degree to which an asset or security can be quickly bought or sold in
the market without affecting the its price. Cash is considered the most liquid asset, while other
physical assets such as real estate, fine art and collectibles are relatively illiquid. Liquidity in the
market can impact your ability to get in and out of trade. One who invests in share market
considers liquidity as one important factor for their investment.

A study on the investment behavior of investors with respect to SHCIL 3

Chapter I Introduction

6. Risk and Return

In investment, risk and return are highly correlated. Increased potential returns on
investment are directly proportional to increased risk. Different types of risks include project-
specific risk, industry-specific risk, competitive risk and market risk. Return refers to either gains
or losses made from trading a security.

7. Trading of shares
Trading means buying and selling a stock the same day or holding it for just 2-3 days, in
the hope of making profit. Trading is of various types such as day trading, swing trading, scalp
trading, pattern trading etc., all forms of trading involves equal amount of risks as it yields
return. The tendency to trade decreases with increase in age of the investor. Old aged people
concentrates on long term investment rather than trading.

8. Delivery

Delivery Trading is a very secure trading. If we buy shares today and sell them after 1
day then the type of trading is called as Delivery Trading. Most brokers charge higher brokerage
on delivery trades versus intra-day trades.

9. Intra-day trading

Intraday trading refers to buying and selling of securities during the same day itself.
Usually the securities do not come to the demat account of the investor. It is selling of securities
before the market closes during the same day. Intraday trading is highly risky. It may or may not
yield the desired returns to the investor.

10. Averaging down

It is one of the investing approaches that all traders ought to think over. This means
buying a stock, watching it drop and then buying more shares, resulting in a lower average price.
You might hear people tell you that averaging down are a great idea, but in fact it's generally a
risky way to operate.

A study on the investment behavior of investors with respect to SHCIL 4

Chapter I Introduction

11. Volatility
This refers to the price movements of a stock or the stock market as a whole. Highly
volatile stocks are ones with extreme daily up and down movements and wide intraday trading
ranges. This is often common with stocks that are thinly traded, or have low trading volumes.

12. Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds, commodities,

currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-
traded and closed funds. Investors should construct an investment portfolio in accordance with
their risk tolerance and their investing objectives. Investors can also have multiple portfolios for
various purposes. It all depends on one's objectives as an investor.

13. Speculation

Speculation is the act of trading in an asset or conducting a financial transaction that has
a significant risk of losing most or all of the initial outlay with the expectation of a substantial
gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain,
otherwise there would be very little motivation to speculate.

14. Inflation

Inflation is the rate at which the general level of prices for goods and services is rising
and which consequently decreases the purchasing power of money. Central banks attempt to
limit inflation and avoid deflation in order to keep the economy running smoothly.

15. Principal

Principal is a term that has several financial meanings. The most commonly used refers
to the original sum of money borrowed in a loan, or put into an investment. Similar to the
former, it can also refer to the face value of a bond.

A study on the investment behavior of investors with respect to SHCIL 5

Chapter I Introduction

1.3 Importance and Scope of Study

The study of investor's behavior plays an important role to mobilize savings and
investment activities in economy. This study on investment behavior of investors will provide for
the following:

1. Will help the novice investors for identifying the suitable strategy for making their
investment
2. Will help the researcher to understand the factors influencing the investment decision of
investors
3. Will account for finding the behavioral pattern of short and long term investors

1.4 LIMITATIONS OF STUDY

1. Most of the samples pertain only to Tamil Nadu region. So behavioral pattern may change
accordingly
2. Influence of extrinsic factors were not considered during the study
3. Limitations extends to number of samples collected for the study
4. People were not ready to share their personal information regarding investment and saving
and it was felt that the respondent were so many times not able to quantify most of the
physical as well as financial assets. The response biases can also considered as a limitation
to the study.

1.5 PROFILE OF THE COMPANY

Origin of Stock Market in India

The origin of the stock market in India can be traced back to the end of the eighteenth century
when long-term negotiable securities were first issued. However, for all practical purposes, the
real beginning occurred in the middle of the nineteenth century after the enactment of the
companies Act in 1850, which introduced the features of limited liability and generated investor
interest in corporate securities.

An important event in the early development of the stock market in India was the formation of
the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present

A study on the investment behavior of investors with respect to SHCIL 6

Chapter I Introduction

day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in
Ahmedabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of
ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during
depressing times subsequently.

Without a stock exchange, the saving of the community- the sinews of economic progress and
productive efficiency- would remain underutilized. The task of mobilization and allocation of
savings could be attempted in the old days by a much less specialized institution than the stock
exchanges.

In short, Stock exchange means a body of individuals, whether incorporated or not, constituted
for the purpose of regulating or controlling the business of buying, selling or dealing in
securities. These securities include:
(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in
or of any incorporated company or other body corporate
(ii) Government securities and
(iii) Rights or interest in securities.

Stock Exchanges in India

The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE)
are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges.
However, the BSE and NSE have established themselves as the two leading exchanges and
account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal
in size in terms of daily traded volume. Both these indices are calculated on the basis of market
capitalization and contain the heavily traded shares from key sectors. The markets are closed
on Saturdays and Sundays. Both the exchanges have switched over from the open outcry trading
system to a fully automated computerized mode of trading known as BOLT (BSE on Line
Trading) and NEAT (National Exchange Automated Trading) System.

The exchange makes buying and selling easy. For example, you don't have to actually go to a
stock exchange, say, BSE - you can contact a broker, who does business with the BSE, and he or
she will buy or sell your stock on your behalf. (IndianMBA.com, 2006)

A study on the investment behavior of investors with respect to SHCIL 7

Chapter I Introduction

Regulation of business in the stock exchanges

Under the Securities Exchange Board of India (SEBI) Act 1992, the SEBI has been
empowered to conduct inspection of stock exchanges. The SEBI has been inspecting the stock
exchanges once every year since 1995-96. During these inspections, a review of the market
operations, organizational structure and administrative control of the exchange is made to
ascertain whether:

1. the exchange provides a fair, equitable and growing market to investors

2. the exchange's organization, systems and practices are in accordance with the Securities
Contracts (Regulation) Act (SC(R) Act), 1956 and rules framed there under
3. the exchange has implemented the directions, guidelines and instructions issued by the
SEBI from time to time
4. The exchange has complied with the conditions, if any, imposed on it at the time of
renewal/ grant of its recognition under section 4 of the SC(R) Act, 1956.

During the year 1997-98, inspection of stock exchanges was carried out with a special focus on
the measures taken by the stock exchanges for investor's protection. Stock exchanges were,
through inspection reports, advised to effectively follow-up and redress the investors' complaints
against members/listed companies. The stock exchanges were also advised to expedite the
disposal of arbitration cases within four months from the date of filing.

During the earlier years' inspections, common deficiencies observed in the functioning of the
exchanges were delays in post trading settlement, frequent clubbing of settlements, delay in
conducting auctions, inadequate monitoring of payment of margins by brokers, non-adherence to
Capital Adequacy Norms etc. It was observed during the inspections conducted in 1997-98 that
there has been considerable improvement in most of the areas, especially in trading, settlement,
collection of margins etc. (IndianMBA.com, 2006)

A study on the investment behavior of investors with respect to SHCIL 8

Chapter I Introduction

1.7 STOCK HOLDING CORPORATION OF INDIA LIMITED

Stock Holding Corporation of India Limited (SHCIL) is a leading financial services

company, promoted by the public financial institutions and incorporated as a limited company on
July 28, 1986. Its promoter organizations include IFCI Bank Ltd, IDBI Bank Ltd, LIC, etc.
SHCIL has 190 companies across the country.

With the introduction of the depository system in the country, SHCIL commenced offering
depository related services to the retail segment and over the last few years, it has come to
acquire the stature of being one of the largest Depository Participants, besides being the
country’s largest and premier custodian. As the first and one of the largest depository
participants in the country, it has been playing a pivotal role in the evolution and development of
capital market related services. (Stock Holding)

MISSION

“To be a world-class, technology driven and client focused market leader in financial and
technical services” (Stock Holding)

Future Outlook

SHCIL played a major role in physical securities. With the introduction of the depository system
in the country, SHCIL made an entry into the retail segment. It has emerged as the premier
custodian and one of the largest depository participants in the country. SHCIL also diversified
into other service areas such as broking, digitalization and storage of documents, selling of
bullion coins and e-Stamping. SHCIL is committed to provide quality and personalized services
to all its customers with a motto “Service with a Smile”. (Stock Holding)

A study on the investment behavior of investors with respect to SHCIL 9

Chapter I Introduction

ORGANISATION CHART

MANAGING DIRECTOR

REGIONAL MANAGER

AREA MANAGER

BRANCH MANAGER MARKETING TEAM

LEADER

EXECUTIVES FIELD ON SERVICE

(FOS) TEAM

A study on the investment behavior of investors with respect to SHCIL 10

Chapter I Introduction

Products and Services

Stock Holding Corporation of India Limited offers a basket of financial products and services. It
is one stop shop for all financial problems. The variety of products offered by SHCIL caters to
the needs of most of the people in the society. Being the largest Depository Participant, it
provides greater value by servicing people in a logical and systematic manner. The products and
services offered by SHCIL are also called as GoDMEN BrIICS which are as follows: (Stock
Holding)

1. Government of India Bonds

2. Dematerialization services

3. Mutual Funds

4. E-stamping

5. National Pension system

6. Broking services

7. Initial Public Offering (IPO)

8. Insurance

9. Capital Gain Bonds

10. Silver and Gold- Bullion

Therefore the first chapter was all about the importance and scope of the study along with
its limitations. It also contained the theoretical concepts that incline with the study. It gave an
overview of the industry i.e., Stock Market Industry in India which was continued by profile of
the company i.e, Stock Holding Corporation of India Limited (SHCIL) where my project was
carried out. The Review of Literature related to the study topic will be continued in Chapter II.

A study on the investment behavior of investors with respect to SHCIL 11