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ABSTRACT

Finance,  specifically, 
in corporate  terms,  the system 
of  internal  control 
regarding  the procurement  and 
effective  utilization  of funds 
post  identification  of 
feasible investment 
opportunities  pertaining  to 
profitability  promotion  that 
adequately compensate  for  the 
cost  and  risk 
borne  by  the 
business  undertaking/enterprise.
Capital market, in India, has  been  significantly 
contributing  towards  the facilitation  of 
moderate  and  long 
term  finance  provision 
from  the surplus  units 
to  the  deficit 
units.  A  Developing 
economy  like  India needs  
a  growing  amount 
of  investor  savings 
to  flow  to 
corporate enterprises.  The  level 
of  equity  market 
participation  of  the 
retail  investors  has 
been  increasing  over 
the  past  few 
years  that  evoked the 
need  of  studying 
the  socio-economic  profile 
of  the  retail  
investors,  factors  influencing 
the  investment  behaviour 
of  retail investors,  examining 
the  trading  practices 
of  retail  investors 
in equity  markets,   factors 
affecting  the  risk 
assumption  abilities  alongside 
the  problems  faced 
by  retail  investors. 
Historical   evidences  based 
upon  secondary  facts 
support  the  undertaken scope  of 
the  study.  A 
comprehensive  study
involving  macro-economic  parameters 
influencing  the  primary 
and  secondary  securities 
market  trends,  corporate 
fundamental factors, 
technical  indicators  and 
investor’s  behaviour  patterns 
were  carried  out 
to  understand  the 
performance  of  Indian 
capital  market  in 
recent  times.  The 
research  elicits  the 
opinion  of  the  retail  investors 
on  the  policy 
making  of  capital 
market  thereby  suggesting 
certain  measures  to the 
policy  makers  for 
the  protection  and 
promotion  of  investors.   

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KEYWORDS:
Financial market, Stock Exchange,
Primary and Secondary Markets, Capital markets.

 

Tracing the origin of finance, there is
substantiation to demonstrate that it is as old as human life on earth.
Originally a French word, it was adopted by English Speaking communities to
mean” the management of money” which is in the modern era organised as a branch
of economics. According to academicians, “finance is the procurement and
effective utilisation of funds. It also deals with profits that adequately
compensate for the cost and risk borne by the businesses”. Finance, the science
of money management and the actual process of acquiring the adequate quantum of
required funds encompasses the oversight creation and study of money, banking
credit, investments, assets and liabilities that makeup financial systems. Basic
conceptuality of finance comes from one of the fundamental theories i.e. time
value of money, which essentially states that a rupee today is worth more than
a rupee in the future. Since individuals, businesses and government entities
need funding to operate, the field is often separated into three main
sub-categories: personal finance, corporate finance and public (government)
finance.Creating physical assets with the money, carrying on operating business
activities and acquiring financial securities are all commitments of monetary
resources at deferent times with an expectation of economic returns in the
future.The best optimal mix of funds in order to obtain the desired and
determined results respectively out of the owned funds and borrowed funds shall
not result in loss of profitsto the entrepreneurs thereby recovering the cost
of business entities effectively and efficiently. Internal controls/checks
maintained in the work place are set off rules and regulations framed at the
inception stage of the organisation and is altered depending upon businesses
requirement with better futuristic decisions involving quantitative analysis of
the organisation serves as an indicator of sectorial growth and desired
returns.The fund raising process involves a number of stages, during the course
of which a company appoints pivot financial advisors to deliver the objectives
and goals of the company with having an access to a network of contacts
including financial institutions, private equity investors, venture capitalists
and debt financing investors.

 

LITERATURE
REVIEW

Investments are made with an avowed of
maximizing the wealth. Investors need to make rational decisions for maximizing
their returns based on the information available by taking judgments free from
emotions (Brabazon.T, 2000).
Investment decisions are also affected by investor’s psychology. Investors make
investment decisions before outcomes are certain. Psychologists have found that
as decisions become more difficult and involve higher levels of uncertainty the
decisions tend to be more greatly influenced by emotions and feelings (Cianci, 2008).Investors often want to
hold a stock until it goes back up to the price paid for it no matter how long
it takes. Such a decision is based not much on the opinion that the stock is a
greater investment opportunity for them but more on the desire to avoid that
awful feeling associated with admitting mistake successful investors are able
to understand and overcome these adverse psychological influences (Iyer B and Baskar RK, 2002).Investors
in various places acknowledge the role of emotions in investment decision
making and their empirical results suggested that the demographic factors
influence the investor’s investment decisions (Shanmugasundaram V and Balakrishnan V, 2010).

 

RESEARCH
METHODOLOGY

The research paper is an attempt of
exploratory research based on the secondary data sourced from journals,
internet, articles, literatures, newspapers, previous research papers. Keeping
in view the requirements of the objectives of the study, the research design
employed for the study is of descriptive nature. Focusing on the determined
objectives strictly, the research design was adopted to have greater precision
and in-depth analysis of the research study. Available secondary data was
extensively used for the study. The investigator procures the required data
through secondary survey.

 

OBJECTIVES
OF THE STUDY

·        
The contribution of Indian capital
market towards the provision of medium and long-term finance to the deficient
units.

·        
To trace the retail investor’s
participation in the equity capital market over the past few years.

·        
Tostudy the socio-economic profile of the
retail investors, investors buying behaviour and practices.

·        
Toassess the fundamental and technical
factor for understanding the recent performance of the Indian capital market.

·        
The hurdles commonly faced by small
retail investors in the Indian capital market prior to arriving at an
investment decision.

·        
To recommend for the enhanced
participation of the retail investors towards the contribution in strengthening
the financial deepening process in India.

·        
Tohighlight the steps taken by the
government to strengthen the retail investor’s capital base.

 

FINANCIAL
MARKET

The financial market is a broader term
describing the mechanism, where trading of securities including the equities,
bonds, currencies and derivatives occur. Some large financial markets including
the New York stock exchange, NASDAQ, Tokyo stock exchange, London stock
exchange and the forex markets trade trillions of dollars of securities on an
intra-day basis. Financial market prices may not indicate the true intrinsic
value of a stock due to macro-economic forces. The prices of securities are
heavily reliant on informational transparency by the issuing company to ensure
efficient and appropriate prices are set by the market. A financial market
consists of two major segments: a) Money market and b)Capital Market.

 

MONEY
MARKET

Money market is a market for short term
funds, which deals in financial assets whose period of maturity is up to one
year. The Indian money market consists of RBI (the leader of the money market),
commercial banks, co-operative banks and other specialised financial
institutions like (NBFCs) Non-Banking Financial corporations, LICs, UDIs etc.,Operating
in the Indian money market.

Money Market Instruments: Call Money,
Treasury Bill, Commercial Paper, Certificate Of Deposit, Repurchase agreement.

 

CAPITAL
MARKET

Capital market is an institutional
arrangement for borrowing medium and long-term funds which provides facilities
for marketing and trading of securities. It constitutes all long-term
borrowings from banks and financial institutions, borrowings from foreign
markets and raising of capital by issuing various securities such as stocks,
debentures, bonds etc. It consists of two different segments namely primary and
secondary market. The primary market deals with fresh securities and therefore,
also known as new issue market; whereas the secondary market provides a place
for purchase and sale of existing securities and is often termed as stock
market or stock exchange.

 

PRIMARY
MARKET

The arrangement which facilitates the
procurement of long-term funds by companies via making fresh issue of shares
and debentures is usually done through private placement to friends, relatives
and financial institutions or by making public issue. The well-established
legal procedure involving a number of intermediaries such as underwriters,
brokers, etc. which form an integral part of the primary market, for e.g. Public
sector undertakings such as ONGC, GAIL, NTPC and the private sector companies
like TCS, jet-airways and so on.

 

SECONDARY
MARKET

The secondary market also known as stock
market or stock exchange plays an equally important role in mobilising long-term
funds by providing the necessary liquidity to holdings in shares and
debentures. It provides a place where these securities can be en-cashed without
any difficulty and delay. It is an organised market where shares and debentures
are traded regularly with high degree of transparency and security. In fact, an
active secondary market facilitates the growth of primary market as the
investors in the primary market are assured of a continuous market for
liquidity of their holdings. The players in the secondary market including
stockbrokersare the members of the stock exchange who facilitate the trading.

 

DISTINCTION
BETWEEN PRIMARY MARKET AND SECONDARY MARKET

The main points of distinction between
the primary and secondary market are as follows;

·        
FUNCTIONS: While
the main function of primary market is to raise long-term funds through new
issue of securities, the main function of secondary market is to provide
continuous and ready market for the existing long-term securities.

·        
PARTICIPANTS: While
the major players in the primary market are financial institutions, mutual
funds, underwriters and individual investors, the major players in secondary
market are all of these and the stockbrokers who are the members of the stock
exchange.

·        
LISTING
REQUIREMENTS: The securities can be dealt with in the secondary
market, which have been approved for the purpose (listed), there is no such
requirement in case of primary market.

·        
DETERMINATION
OF PRICE:
In case of primary market, the prices are determined by the management with due
compliance with SEBI requirement for new issue of securities and hence,
determined by forces of demand and supply of the market and keeps on
fluctuating.

 

CAPITAL
MARKETS VS DEPOSITORY INSTITUTIONS

Saving is funnelled from surplus units
to the deficit units primarily via the capital markets or through depository
intermediaries. In the first case, intermediation occurs through the exchange
of securities. The saver invests the proceeds in a financial market instrument
issued by the entity that wishes to obtain the funds. The capital markets
intermediation occurs via wide array of instruments including common and
preferred equities, convertible bonds, corporate bonds, mortgage-backed
securities, and other asset-backed securities.In the second case in which depository
intermediaries play a role, intermediation differs in three important respects.
First, the investor does not have a claim on the ultimate beneficiary of the
funds.Second, the price of this claim does not typically fluctuate in response
to the shifts in supply and demand. Third, the investor can not normally sell
this claim to a third party. Instead, to end the contractual arrangement early,
the investor might suffer a penalty such as 90 days of foregone interest in the
case of early withdrawal of a bank certificate of deposit. Regular bank lending
is not usually classed as capital market transaction even when loans are
extended for a period longer than a year. An important difference is that with
a regular bank loan the lending is not securitized.Another difference is that
lending from banks and similar institutions is more heavily regulated than
capital market lending. Furthermore, bank depositors and shareholders tend to
be more risk averse than capital market investors. All such differences act to
limit institutional lending as a source of finance. The Difference favouring
lending by banks is that the banks are more accessible for small and medium
companies and that they have the ability to create money as they lend.

 

ROLE
OF RETAIL INVESTORS IN THE CAPITAL MARKET

Retail investors play a prominent role
in the capital market along with the foreign institutional investors and domestic
financial institutions. The retail investors assume greater significance
because the household savings account nearly 30% of GDP and it is the prime
source of funding. But, it is deplorable that the household investors park
their savings only 2% to 3% in capital market, perhaps because they have burnt
their fingers in the market scams, manipulations and also on account of the
higher volatility. In accordance with SEBI(disclosure of investor protection)
guidelines, retail individual investor is defined as the one who applies or
bids for securities of or for a value. However, SEBI has since increased the
limit for retail investors. No study about the securities market will be
complete without the mentioning of investors and stakeholders particularly the
retail investors.  It becomes the duty of
the market regulator and other intermediaries to protect the interests of the
investors. Retail investors are advised to trade with an abundant caution and
with limited amount of capital to undertake the risk. As retail investors look
for long-term investment in converse to the FIIs, FFIs, QIBs and HINs play for
short-term games, the government and its various agencies must look after the
interests of the retail investors for building up the strong economy. Higher
the investor’s confidence more is the chances of putting their savings in
productive channels. There is growing concern about the safety and integrity of
capital market at the international level so as to make the stock market safer,
transparent and devoid of frauds and scams. Today, Indian securities market is
one of the most robust and vibrant securities market in the world with latest
technology, shortest settlement cycle, paperless transactions and screen based
trading system, better corporate governance and faster dissemination of
information. However, the retail investors have preferred to invest their hard earned
money in other safer modes of investment like bank deposits, insurance
products, mutual funds, gold, real estate etc. Although, price manipulations,
increased volatility, repeated scams, ineffective corporate governance norms
etc. have been the main reasons for keeping the retail investors away from the
securities market. Safety of the invested money, liquidity of the instruments
invested and return on the investmentare the pivotal objectives while investing.
Vibrant securities market ensures that the interests of the investors are taken
care of so as to maintain safety of their investments and ability to derive
handsome returns. A strike is needed to balance between raisers of capital and
the interests of investors. Unless and until, we are able to protect the
interests of retail investors the corporate houses would find it very difficult
to raise finance over a very long period of time.

 

THE
CURRENT STATE OF DEVELOPMENT OF LOCAL CAPITAL MARKETS

Capital markets have expanded in many
countries in recent decades, especially in emerging markets. For example, total
debt securities outstanding grew from 47% of GDP in 1994 to 72% of GDP in 2010
globally but this was outpaced by a fourfold increase from 13% to GDP in 1994
to 54% of GDP in 2010 in upper middle income countries. Similarly, the
capitalisation of stock markets (relative to GDP) saw an increase of about 50%
globally but a more than twofold increase in upper middle income countries over
this period.

 

CHALLENGES
IN THE DEVELOPMENT OF CAPITAL MARKETS

The proper functioning of capital
markets requires the several preconditions classification into 3 groups: sound
macro-economic policy, strong institutional and legal setting and a
well-functioning financial infrastructure. Without this precondition, the
government efforts to develop local capital markets are bound to fail,
resulting in shallow markets and duped investors and therefore generally
advisable to sequence financial reforms such that these conditions are
sufficiently in place before local capital markets are established.

 

BENEFITS
TO THE RETAIL INVESTORS FROM THE CAPITAL MARKETS

 Wisely taken investment decisions putting into
consideration the viability of the company, critical analysis of its
fundamentals, past financial performance, management structure, business
environment, market competitiveness and other macro environment factors turns
out to be desirable and fruitful.

·        
CAPITAL
APPRECIATION: It entails the difference between the purchasing
and selling price of a share of a company. For instance, the buying price is
Rs.100 per share and the selling price for the same is Rs.150 per share, then
Rs.50 per share turns out to be the capital appreciation.

·        
DIVIDEND
PAYMENT:Shareholders
are entitled to dividends, if declared. A sum of money agreed upon by the
directors of a company to be paid on proportional basis from the company’s
profit in a given financial year.

·        
BONUS
ISSUE:
Shareholders/investors are also entitled to bonus issue, if declared. Hence,
entailing a shareholder to acquire additional shares from the company where he
invested in, without necessarily paying for these shares.

·        
PARTICIPATE
IN THE RIGHTS ISSUE: Investors are opportune to participate
in Rights issue of the company, although rights issues are paid by the
investors but the price is usually lower than the prevailing market price.

·        
PARTICIPATE
IN DECISION MAKING: Right to attend annual general meeting
of the company thereby participating in its decision making and exercising
voting rights.

·        
COLLATRERAL
FOR OBTAINING LOAN FROM THE BANK:It will interest investors that
they can use their share certificates as collateral to obtain bank loans for
individual use or business development.

·        
PREPARATION
TOWARDS PERSONAL PENSION PLAN:Buying of stocks could be used as
individual preparation towards personal pension plan, therefore having an
opportunity to considerably invest in the stock market during earlier age.

 

CHALLENGES
FACED BY THE RETAIL INVESTORS

·        
SMALL
INVESTORS:
An institutional investor is someone who trades stocks for a living at a bank
or other financial institution. While the small investor is someone with less
capital invested in the stock market trades for himself, not for a company.
Although, small investors generally invest in stocks, mutual funds and index
funds, investment choices available like options, futures, forwards and swaps are
usually too complicated and expensive for small investors.

·        
COSTS:A
company can negotiate a lower buying price than a family store;large investors
are able to negotiate lower investment fees than smaller investors. Brokerage
firms typically charge a higher percentage for management fees on small
accounts than on larger accounts. This means as a small investor a higher return
for the year to break even is the requirement. Funds that don’t trade often,
especially index funds, have very low annual fees.

·        
DIVERSIFICATION:The
investment strategy of diversified portfolio across different companies and
industries is less likely to lose money at the same time. As a small investor, it’s
harder to build own diversified portfolio due to limitation of available
resource to spread across various industries.

·        
INFORMATION; One other disadvantage from
the small investor’s point of view is the information asymmetry.
Professional investors have research staffs that are constantly providing them
with up to date information. As a small investor, it can feel one step behind
our competitors. However, the internet has made a big dent in this
disadvantage. While professionals still have an information advantage, they
don’t have nearly the same head start as they did before the internet.

 

FINDINGS

Analysis states a strong negative
correlation between the number of listed fixed income products available to
retail investors and depth of retail trading activity. There has been a higher
degree of substitutability between listed fixed income and equity products. In
fixed or partly negotiable fee model environments, reductions in brokerage fees
are strongly positively correlated with increase in trading activity. Reduced
trading fees in a market with a non-negotiable fee model has a positive
influence levels of trading activity increase in cost-to-trade are associated
with declines in depth of retail activity as there is a significant negative
relationship between increase in clearing fee and levels of trading activity.
Moving from a fixed to a negotiable or even partly negotiable fee model, has
the effect of reducing cost-to-trade.

 

SUGGESTIONS

The outcome of this research leads to
the suggestion that the regulators must include the role of behavioural dimensions
in its awareness campaigns due to the criticality of these factors in
investment decisions. It is recommended that the investment analyst must
incorporate behavioural factors in their analytical model qualitatively. The media
must create awareness about the behavioural dimensions that are equally
important like technical factors. This research also recommends appropriate
measures to address the genuine apprehensions of the retail investors. There is
need to increase the retail investor participation and this could be done by
increasing the financial literacy and awareness, expanding the number of
issues, providing diverse investment options, training and increasing the reach
of intermediaries, enhancing investor protection measures, simplified norms and
cost-effective services.

 

CONCLUSION

In addition to the usual suggestion
about improving market micro-structure to bring in best practices from international
markets,a few concrete steps that can be taken specifically to facilitate debt
investments by small investors in India. The small investor’s attitude towards
debt instruments needs change, and that this will be impossible without a
radical overhaul of the small savings schemes in India. There seems to be
widespread misconception about pooled investment vehicles that needs to be
removed as investments such as mutual funds can really fulfil the entire range
of risk appetite for small investors while increasing the depth and width of
primary and secondary debt capital markets. Finally some suggestions regarding
market innovations in terms of a derivative product (Counter Party Risk
Protection Security) that may help allay small investors concerns while
transacting in corporate securities and help fuel growth in these markets.

 

 

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