A WORKING PAPER

ON

by Individual Investors

Qualitative ResearchAn Empirical study in context of developing countries like Pakistan

Submitted By: M.Sami 11456

Name of Scholar: Prof. Nadeem Iqbal

Course: MBA (P) 3-B

Submitted To:

Prof. Nadeem Iqbal

Factors Effecting Investment Decision in Stock Exchange

Abstract:

This study aims to understand the factors which effect investment decision by individual investors in

stock exchange of Pakistan. The search targets randomly selected Lahore stock exchange investor.

Through use of unstructured interviews we find those factors which effect the investment decision and

investment strategies in stock exchange. Finding of our research is very helpful for the investment

decision in stock exchange in Pakistan. We found saving factor, risk factor, political and economical

factors and return on investment which effect on investment decision. The study understands the

cluster of factors which effect the investment decision in stock exchange. In this study we used main

three themes: Strategies for investment, factors that effects on investment decision and

recommendation. Our findings emphasize the investor which makes investment decision for investment

in stock exchange.

Keywords: investment decision, Savings, Risk, Political and Economic factors, Return on

investment

The Lahore Stock Exchange (Guarantee) Limited came into existence in October 1970, under

the Securities and Exchange Ordinance of 1969 by the Government of Pakistan in response to

the needs of the provincial metropolis of the province of Punjab. It initially had 83 members

and was housed in a rented building in the crowded Bank Square area of Lahore. The number of

listed companies has increased to 519 since its inception. With 37 sectors of the economy and

519 listed companies with total capital of Rs. 555.67 billion having market capitalization of

around Rs. 2.51 trillion. The LSE has 152 members of which 81 are corporate, and 54 are

individual members. The LSE was the first stock exchange in Pakistan to use the internet and

currently 50% of its transactions are via the internet. The Lahore Stock Exchange has opened

branches in the industrial cities of Faisalabad and Sialkot for trading. The Sialkot branch is

referred to as the "Sialkot Trading Floor".

Investment means putting your money to work to earn more money. Investing even a small

amount can produce considerable rewards over long term especially if you do it regularly. But

you need to decide how much you want to invest and where. The choose wisely you need to

know the investment option thoroughly and he relative risk exposures. The benefit of

investment are financial independence increase in wealth fulfill personal goals desire of family

members increase knowledge and increase vision (Ashis Dubey, 2009).

The purpose of conducted this study is to determine the factors that effect the investment in

stock exchange by individual investor. The investment issue in Pakistan and provide a

framework for the upcoming researcher so that they can do more work it and gives the

recommendation on it. Since the world is came into being the people are trying to make

development from one step to the next and next. The principle technical economics and

policies factors influencing investment in long rotation. Technical factors are principally

biological factors and that influence the scale risk and return of the plantation investment. The

economic factors that influence investment are those that impact on costs and returns in direct

way taxes and prices are really based on current market factors (R. Health cote and Varmola

2002). So from above theories it is clear that to survive in the world one has to earn money to

earn money. A business is required which is your investment but investment is not easy today

in stock market. There are a lot of factors which puts impact on the investment decision by

individual investors in stock market.

Today the field of investment is even more dynamic then it was only a decade ego. World

events occurs rapidly events that after the value of specific assets. The individual has so many

assets from which to choose and the amount of information available to the investors is

staggering and continuously growing the development of personal computers and the

dissemination of information on the internet have increase individual ability to take investment

and the perform investment analysis(Herbert B. Mayo book of investment 2003).

Chang and Doina (2003) said that promoting investment is of particular importance in European

transition economics since in these countries play crucial role for stimulating private

investment. Investors of the stock market are rational and they efficiently respond to new

information regarding the stock market products. In others words investors’ decision in the

market fully relates the effects of any information revealed. There are no changes of abnormal

return in the market in the long run (Fama, 1970). Traditional finance theories of neoclassical

finance ignore the importance of investor’s behavior in the decision making due to the

ignorance. The investor’s behavior is not coward within the framework of traditional finance.

Sometime the investors make irrational decision and do not behave rationally because of their

limitation of capacity to process the information (Simon, 1986).

Investment decision is significantly influenced by the business as well as the fundamental of

investment. Investment decision by investors as being considered as based for success or

failure of his or her business. While making investment decision fundamental and different

heuristics (i.e. representativeness, anchoring and adjustments) are also used as mention by

(Amir and Ganzach, 1998). Some investor used fundamental and some take decision on the

basis of emotion, feeling, thoughts, affective reaction which come into the biasness of the

investors. So investment is effect by both business and fundamental. Sometimes decision takers

on the basis of fundamental go failed as mentioned by (Abarbanell and Bernard 1992). Once

the risk behavior of investors has been formulated, they frame their possible investment

return. When the risk which is joined with low return products is low then these products are

accepted. Otherwise the risk which is joined with high return product is high then those

products are accepted because of high return (Roney and Kim, 2006). The investment has great

importance today. No one really tell how importance public investment is in the overall

schemata of things in the end investment dictate the ebb and flow of whole national economies

(Benedict yossarian 2004). Investment in a great word and has very importance. Today world

investment means to use money in the hope of making money. (Investors words) you do not

have to be wealthy to be investors investing even a small amount can produce considerable

rewards or long term especially if you do regularly.

Investment Decision

In this research paper “The Investment Behavior Decision Factors and Their Effects toward

Investment Performance in the Taiwan Stock Market” (Ching-Yaw Chen, Fung Ping Zu, 2010)

researcher used SPSS for windows to process data according to the research motivation and

research framework. The data was processed by statistical analysis that includes descriptive

statistics. One way Anova, Regression, Correlation and Regression analysis. Two hundred

questionnaires were sent to investors by adopting purpose sampling. 191 questionnaires were

retuned in which 68 filled by male and 122 from female. In this article writers conclude that

investors with various assets level do show a significantly different reference to market

selection. On the other hand the investor’s background variables cost no significant difference

in investment behavior, which suggests that strategy selection is less of a consideration for the

investors.

In this research paper “The Analysis of Factors Affecting Investment Choices of Households in

Turkey” (Halil Tunah, Yerdelen Tatoglu, 2010) 1300 survey are conducted in Istanbul Turkey and

question are directly to household head. In these research investment choices independent

variable use in questionnaires and personal questionnaire, profession, gender and education

also include. After summarizing independent variable, descriptive statistics are analyzed with

multinominal log it model and expositions are made according to the probability results. This

paper investigates relationships between investment choices and personal factors, personal

savings, credit cards and expenditures. One of the important contributions of this study is that,

not only it supports numerically the relationships introduced by economic theory with

econometric estimations it also displays different relations using these estimated results. The

results show that investment choices of households are affected not only by economic factors

but also by social and personal factors.

In this research paper “Financial Literacy and Investment Decision of UAE Investors” writer (Al

Anood Bin Kalli, Hussein A. Hassan Al-Tamimi) used quantitative research. A modified question

has been developed divided in three parts. The first part covers demographic variables. The

second part identifies thirty seven factors affecting the investment decision of the UAE

investors. The third part is devoted to financial literacy using exam-type questions of true and

false and includes eighteen questions. A convenient sample of 290 of UAE national investors

was used. The total number of questionnaires was 600 questionnaires. The questionnaire asked

each respondent to provide some demographic data that included age, gender, income,

education, employment status and work place activity. Descriptive statistical data test apply for

the result. Regression and correlation analysis were used. In this research researcher conclude

that financial literacy is far from the needed level. Financial literacy level was found to be

affected by income level, education level and work place activity. He found that significant

difference in the level of financial literacy was found as well between the respondents

according to their gender. Specifically, women have lower level of financial literacy than men.

Financial literacy affected significantly the investment decision of the individual investors.

In this article “The Determinants and Impact of Foreign Direct Investment in Central and

Eastern Europe” (Vladimir Benacek, Miroslaw Gronicki, Dawn Holland and Magdolna Sass,

December, 2000) writer used three main sources of information that address the question of

FDI in Central Europe. The first is aggregate data collected by national statistics offices and

international sources such as the IMF. The second is firm level sample data collected by official

sources. And the third is the responses to detailed sample survey questionnaires of foreign

companies operating in the region. He considered a sample survey of investment from the

major European and North American countries into the Czech Republic, Hungary, Poland,

Romania and Slovakia between 1989 and 1996 (334 firms). He found that a perverse

relationship between foreign investment and output growth. Expected market growth may be a

more important factor in determining the distribution of FDI, but such expectations are very

difficult to measure. He found that econometric evidence supports the findings of survey

studies; inflows of FDI have improved the overall growth potential of the economies, but

primarily through productivity 27 improvements within the foreign firms, rather than through

increased capital investment.

In this article “The Foreign Direct Investment Survey” (A study conducted by the multilateral

investment guarantee agency with the assistance off Deoloitte and Touche LLP (January 2002)

this report presents the findings of a survey administered to a sect oral cross-section of

transnational companies in July and August 2001, and updated in October 2001. Special care

was taken to develop a 16-question survey instrument that captured each of the elements of

interest, particularly the factors driving investment decisions. A total of 643 companies

responded to the mailing, of which 191 indicated their investment plans. The remaining 452

businesses declined to participate in the survey. The survey questionnaire was initially mailed to

3,000 companies, approximately 1,500 from the United States and 1,500 from all other

countries. While the data and analysis presented in this report reflect the views of the

companies that responded, there is clear evidence that companies worldwide continue to look

beyond their national boundaries when considering near-term investment opportunities. While

global economic uncertainty is leading some companies to become more conservative. This is

particularly true of companies based in developing countries that are seeking to develop new

operations and markets abroad. Overall, the results of the October survey among responding

companies planning to implement international expansion projects in the next three years

show that for a large majority

In this article “Factors influencing individual investors Behaviors”: An empirical study of the UAE

financial markets (Hussein A. Hassan Al-Tamimi (2005). This paper developed modified

questionnaires to examine the behaviors of the UAE investors. The questionnaires items

represents five categories, namely self image coincidence, accounting information, neutral

information, advocate recommendation and personnel financial needs. Based on these

questionnaires, the most important item and the most important category will be identified. In

order to get the answer on the research question, 350 questionnaires were randomly

distributed to 350 individual investors in both Dubai financial market was 66,772 investors and

154,041 investors of Dubai financial market at the measures was assessed with the use of

Cronbach’s alpha. Cronbach’s alpha allows us to measure the reliability of the different

categories. It consist of estimates of how much variation in scores of different variable is

attributable to change and random error (Selltzm, et al, 1976). At the end five factors were

found to be the least influencing factors on the UAE investors behavior. The least influcing

factors on the UAE investor behavior. The least influencing factors in order of importance were

expected losses in other locall investments minimizing risk, expected losses in international

financial markets, family member opinion, and gut feeling on the economy.

In this article “Behavioral Portfolio Analysis of Individual Investors (Arvid O. I. Hoffmann, Hersh

Shefrin, Joost M. E. Pennings 2006)” used the analyses in this paper draw on transaction

records of all clients and questionnaire data obtained for a sample of clients of the largest

online broker in The Netherlands. Due to trading restrictions, we exclude accounts owned by

minors (age <18 years). The researcher designed and performed an online survey amongst all

clients of the online broker. In total, 6,565 clients completed the questionnaire. After matching

transaction records with questionnaire data, a sample of 5,500 clients and corresponding

accounts remain for which both hard and soft data are available. Descriptive statistics for the

respondents to the investor survey. We also report these descriptive for the non-respondents

to test for selection bias of the sample of 5,500 investors for which both accounting and survey

data is available, 58% is male and the mean age is about 50 years. Investor performance is

defined as the monthly change in market value of all securities in an investor’s account (Bauer

et al., 2009). At the end researcher found that investors driven by objectives related to

speculation have higher aspirations and turnover, take more risk, judge themselves to be more

advanced, and underperform relative to investors driven by the need to build a financial buffer

or save for retirement. He find that investors who rely on fundamental analysis have higher

aspirations and turnover, take more risks, are more overconfident, and outperform investors

who rely on technical analysis.

In this research paper “Factors affecting investment decision in residential development” (Narang

Somil 2007). The research in this project is based on Qualitative and Quantitative research.

Qualitative research is done by administering two questionnaires and Quantitative research is

done by conducting factor analyses and Paired Sample t test on the extracted factors. Two

questionnaires were prepared for the group research; few questions were specifically included

in the questionnaires to identify the factors affecting the investment decision in a residential

property. Survey research has become a staple for policy analysts over past several decades and

has always served as a critical data source in the study of issues of interest to sociologists,

demographers, and political scientists (Jagannathan, 2001). About 129 respondents rated these

factors on a scale of 1 to 5. Researcher used factor analysis to compress the data and entangle

the complex linear relationships between the data. The study uses factor analysis to classify

data based on Co- variance and Correlation and compressed the number of factors into

clusters. These clusters of factors were then related to various income groups, as different

income group people have different needs. The research also focused on to determine the

satisfaction levels of On-site and Off-site management with respect to services such as General

maintenance. According to the research, Low-income group and middle income group people

seem to be affected by the rise in interest rates.

In this article “Racial differences in investor decision making” (Michael S. Gutter, Jonathan J.

Fox, Catherine P. Montalto 1999) researcher used data from the 1995 Survey of Consumer

Finances. The survey, sponsored by the Federal Reserve Board with cooperation from the

Department of the Treasury, provides detailed information about household asset holdings and

debt. The sample for this study is 3,939 households, consisting of households with a Black or

White household head and where the gender of the household head is reported. The Survey of

Consumer Finances consists of five data sets due to multiple imputation of missing responses

(Kennickell, 1997). The descriptive statistics reported in this analysis are weighted. A logistic

regression is used to determine log likelihood estimates of the probability that a household

holds stocks and/or business assets in their portfolio. The dependent variable in the logistic

regression is an indicator variable equal to one if the household owns any stocks or business

assets, and zero otherwise. This dependent variable is appropriate for our needs since we are

interested in the choice to be invested in risky assets, not the amount invested in risky assets.

The explanatory variables used in the model are based on socioeconomic, financial, and

attitudinal characteristics. Descriptive statistics for Black households and White households are

provided in along with the results of tests for statistical differences between the two groups.

The majority of Black households are headed by a single female (51%) whereas the majority of

White households are headed by a married couple (55%). However, 53% of Black households

contain children comparssed to 42% of White households, and 10% of Black households contain

other adult relatives compared to less than 4% of White households. On average, Black

households are larger than White households. For the regression analysis, household income is

categorized into three groups defined by the lowest quartile, middle two quartiles, and upper

quartile of the sample income distribution. The findings of this study are generally consistent

with previous studies that Blacks and Whites have different investment behaviors (Boyce, 1998;

Mabry, 1999; Myers and Chung, 1996; Zhong and Xiao, 1995). With this research researcher

conclude that racial differences in risky asset ownership are due to racial differences in the

individual determinants of risky asset ownership, not to race in and of itself. This enhanced

understanding of racial differences in investor decision making can help financial practitioners

more accurately understand and better serve a racially diverse clientele.

In this article “Financial development and dynamic investment Behavior” (Inessa Love, Lea

Zicchino 2005) researcher used a panel-data vector auto regression methodology. This

technique combines the traditional VAR approach, which treats all the variables in the system

as endogenous, with the panel-data approach, which allows for unobserved individual

heterogeneity. The impulse-response functions describe the reaction of one variable to the

innovations in another variable in the system. Researcher main objective is to compare the

response of investment to financial factors in countries on a different level of financial

development. To achieve this, he split their firms into two samples according to the level of

financial development of the country in which they operate and they analyze the difference in

impulse responses for the two samples. They refer to these two groups as ‘high’ (financial

development) and ‘low’ (financial development). Their firm-level data come from the World

scope database, which contains standardized accounting information on large publicly traded

firms and includes 36 countries with over 8000 firms for the years 1988–1998. The number of

firms included in the sample varies widely across the countries and the less developed countries

are underrepresented. The US and UK have more than 1000 firms per country, while the rest of

the countries have only 136 firms on average. Researcher present graphs of the impulse-

response functions. This research uses a VAR approach to analyze the relationship between

firms’ investment decisions and the level of financial development in their hosting countries. It

shows that the availability of internal funds is more important in explaining investment in

countries with less developed financial systems.

Methodology:

The most important thing in the selection is the nature of the research problem as our research

problem is one fold in nature. We did not found relevant article from our topic. There is no

more research on this topic. So we decided to choose the qualitative method. We used

interpretivism as research paradigm and conduct semi structured interview under the

qualitative paradigm. This study provides the understanding about our research problem.

Research Design:

We select the qualitative research method approach. In this approach for the data collection we

conduct semi structured interview. First we asked open ended questions and used probes and

prompt to get the deep information about our topic and to keep the respondent on track. We

conduct interview from experience respondent so that we get the accurate information about

our topic. Our research based on understanding the factors which effect investment decision in

stock exchange. Our data collection method is cross sectional. We collect all the interview at

once.

Population and sample size:

Our topic is factor effect the investment decision in stock exchange. So our population is

investor of Pakistan stock exchange and we choose our sample in Lahore stock exchange

market because we live in Lahore. If we choose the stock exchange of another city so it is very

expensive for us and we have limited resources, so we choose the investors of Lahore stock

exchange for the purpose of data collection. We conduct 10 interviews from Lahore stock

exchange investors. Sampling procedure which we used in our research is convenience sample.

We find our sample easily in Lahore stock exchange. Sampling techniques we used in our

research is semi structured interview. We conduct semi structured interview from our

respondent.

Analysis & results:

After transcribing the interviews the qualitative data is passed through comprehensive analysis

procedures. In this regard first stage analysis, thematic analysis and stage structured analysis

are conducted through interview grid and coding procedures the results are as follows:

Factors effecting investment decision:

As for as factor that effect investment decision also concerned difference subjects have their

subjective feelings as one of the respondent said

“If u has savings then you make the investment”.

Another respondent added

“Saving is the most important factor for the investment”.

Responded A and B also said that

“It is necessary that you have to take the risk while making your investment”.

Another respondents C and D said

“First of all you also have the knowledge of political and economic condition of the country

before making your investment”.

Another respondent said

“First you check the rate of return then invest your money”.

Strategies:

As for as strategies for investment decision also concerned difference subjects have their

subjective feelings as one of the respondent said

“First of all we should concerned five years balance sheet of the company to see the

profit/loss”.

Another investors added

“We should check the previous five years annual report of the company before investing our

money”.

Another investor said

“See the company growth before investing your money”.

Investors A and B also said that

“Past performance of the company does not effect, see the present scenario of the company

and present earnings ratio of the company”.

Recommendations:

As for as recommendation also concerned difference subjects have their subjective feelings as

one of the respondent said one of the responded said

“You have the complete knowledge about the company which you want to invest your money”.

Another respondent added

“You should have the complete information of the company past profit and loss ratio then you

invest your money”.

Respondent A and B also said that

“First see the company present condition and always make the investment with your personnel

money, do not use the public and bank loan.”

Discussion:

When we analyzed our findings on investment decision in stock exchange we found some major

factors that effect the investment decision. According to our research these factors which effect

the investment decision in stock exchange are savings, risk, political and economic factors and

return on investment and government policies. The previous research which related our topic is

that the researcher, Arago and Fernandez-Izquierdo (2003) argue in their paper that previous

assumption of economic behavior being linear may no longer be true. Research says that

investor view risk and expected return is being non-linear. Rainer (2004) stated that fact the

government policy is one of the favorite topic of every newly elected government leads to

frequent changes in tax basis and tax rates. Kai and Farid (2003) find that both economical and

political factors which have impact on investment decision. Chandra (1990) demonstrates that

Kenya’s recent economic performance has been among the best in investment decision. Jasim Y

(2008) documented that risk is a factor that shapes individual decision including financial and

investment decision. George and Gautam (2003) analyzed that measurement of risk are one of

the most researched area in finance. Shahbaz and Mahmood (2006) realized that savings and

investment are the two key macro variables which can play a significant role in economic

growth and promotion of employment in the developing country. We compared our research

findings with previous research and we found that our findings are matched with previous

researcher findings on investment decision.

Conclusion:

As we interpret that our research will help us to understand the investment decision and

factors that affect the investment decision. Our topic is factors affect the investment decision,

so our main target area is Lahore stock exchange. So we targeted the investors of Lahore stock

exchange and conducted semi structured interview. We are students so we have limited

resources that are why we cannot go other stock exchange of Pakistan. Due to the lack of

resources and time we conduct qualitative research. In this research paper we investigate

factors which affect the investment decision and investment strategies. Our most findings is

relate with previous researcher findings. One of the important contributions in this study is that

we are the first who conduct this research by qualitative method. Our research is very helpful

for that person who invests in stock exchange and our research is very useful for other

researcher who conduct researched on this topic. We conclude the most important factors

which effect the investment decision in stock exchange. The factors should be considered by

the investors for the success of the development.

Proposed Model:

Saving

Risk

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