PROJECT ON IMPACT OF READING IN TAKING INVESTMENT DECISIONS

7/29/2019 PROJECT ON IMPACT OF READING IN TAKING INVESTMENT DECISIONS

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Project on impact of reading in taking investment decisions

INTRODUCTION:

The India is growing at a healthy rate and has been attracting a very good amount of foreign

investments ever since economic reforms commenced in the early 1990s .the rapid changes

taking place in the financial markets due to financial sector reform, the proliferation and

complexity of investment products, and the number of financial scams reported during the

last decade and half calls for more information on personal finance. Lack of financial

knowledge may result in households saving too little and too late in life to reach their various

life cycle goals in general and their retirement goals in particular. This will result in their

inability to achieve the desired balance between consumption while working and

consumption on retirement. Many financial assets are available in the form of bank deposits,

government and corporate fixed income securities, mutual funds units, common stocks,

provident and pension funds, insurance, home, real estate, gold; etc.each asset has a different

rate of return, risk and liquidity.

Many individuals find investments to be fascinating because they can participate in the

decision making process and see the results of their choices. Not all investments will be

profitable, as investor wills not always make the correct investment decisions over the period

of years; however, you should earn a positive return on a diversified portfolio. Investing is

not a game but a serious subject that can have a major impact on investor's future wellbeing.

Virtually everyone makes investments. Even if the individual does not select specific assets

such as stock, investments are still made through participation in pension plan, and employee

Saving programme or through purchase of life insurance or a home or by some other mode of

investment like investing in real estate (property) or in banks or in saving schemes of post

offices. Each of this investment has common characteristics such as potential return and the

risk you must bear. The future is uncertain, and you must determine how much risk you are

willing to bear since higher return is associated with accepting more risk. (lopes, 1987)the

individual should start by specifying investment goals. Once these goals are established, the

individual should be aware of the mechanics of investing and the environment in which

investment decisions are made. These include the process by which securities are issued andsubsequently bought and sold, the regulations and tax laws that have been enacted by various

levels of government, and the sources of information concerning investment that are available

to the individual. Today the field of investment is even more dynamic than it was only a

decade ago. World event rapidly events that alter the values of specific assets the individual

has so many assets to choose from, and the amount of information available to the investors

is staggering and continually growing. The key to a successful financial plan is to keep apart

a larger amount of savings and invest it intelligently, by using a longer period of time. The

turnover rate in investments should exceed the inflation rate and cover taxes as well as allow

you to earn an amount that compensates the risks taken. Savings accounts, money at low

interest rates and market accounts do not contribute significantly to future rate accumulation.


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While the highest rate come from stocks, bonds and other types of investments in assets such

as real estate. Nevertheless, these investments are not totally safe from risks, so one should

try to understand what kind of risks are related to them before taking action. The lack of

understanding as how stocks work makes the myopic point of view of investing in the stock

market ( buying when the tendency to increase or selling when it tends to decrease)perpetuate. To understand the characteristics of each one of the different types of investment

you must have enough financial knowledge. Furthermore, inflation has served to increased

awareness of the importance of financial planning and wise investing. More inflation is a

worry for each and every individual. Due to inflation value of your money in future will

decrease. To cope up this, investors wants to invest their money and earn certain rate of

return which is more then rate of inflation. Having clear reasons or purposes for investing is

critical to investing successfully. Like training in a gym, investing can become difficult,

tedious and even dangerous if you are not working toward a goal and monitoring your

progress

The classical theory of portfolio choice rests on strong assumptions: no transaction costs,

investors awareness of the full menu of assets available and knowledge of their risk and

return, no uninsurable risks, such as human capital. If all investors face the same distribution

of returns and have the same information set, in equilibrium they select the same menu of

risky assets. Differences in attitudes to risk affect the allocation of wealth between safe and

risky assets, but not the particular asset selected. And if the utility function has constant

relative risk aversion, asset shares are independent of wealth. Under these assumptions, the

rich mans portfolio is simply a scaled-aup version of that of poor mans. However recent

empirical studies have shown that household portfolios exhibit far too much heterogeneity tobe consistent with this sort of uniformity. In particular, many individuals simply do not invest

in stocks, a feature that has come to be known as the stockholding puzzle. Fixed entry costs

have been the main thesis in the literature to resolve the puzzle. With entry costs, investors

benefit from stock market participation only if the (certainty equivalent) expected excess

return from participation exceeds the fixed cost. Since the gain increases with wealth, entry

costs make strong predictions about the relation between wealth and the probability of

investing in stocks. In particular, investors with wealth below a certain threshold do not enter

the stock market, those above it do. Empirical evidence in guise, halass and jappelli (2003)

documents a strong positive correlation between stock market participation and household

financial wealth in many industrialized countries, supporting the entry costs thesis.1 but there

is also the international evidence that many affluent households do not invest in stocks which

suggests that other forces than entry costs alone may be at work. Furthermore, the entry cost

literature does not explain the origin and nature of these costs. Yet understanding what

inhibits stock market participation is crucial for policies aimed at encouraging portfolio

diversification and spreading the equity culture. We argued in the introduction that

awareness of the existence of stocks (or, for that matter, any financial asset) is exogenous to

the investors choice set. But then, how is it that some investors are aware of a wide menu of

financial assets, others only a small set of investment opportunities? And how do individuals

come to know about financial assets? Here we address these questions, singling out some ofthe key determinants of awareness and obtaining predictions that can be tested empirically.


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Before you make any decision, consider these areas of importance:

1. Evaluate your current financial roadmap.

Before you make any investing decision, sit down and take a fresh look at your entire

financial situation. An important step to successful investing knows your current goals and

risk tolerance. These factors may have changed with the current economy.

2. Evaluate your comfort zone in taking on risk.

Traditionally, if you have a financial goal with a long time horizon, you are likely to make

more money by carefully investing in asset categories with greater risk, like stocks or bonds,

rather than restricting your investments to assets with less risk, like cash equivalents. On the

other hand, investing solely in cash investments may be appropriate for short-term financial

goals. The principal concern for individuals investing in cash equivalents is inflation risk,

which is the risk that inflation will outpace and erode returns over time. With todays market

volatility, investors must evaluate their acceptance and comfort zone for risk. Can you

stomach the current up-and-down market for longer term goals?

3. Consider an appropriate mix of investments.

Historically, the returns of the three major asset categories stocks, bonds, and cashhave

not moved up and down at the same time. Market conditions that cause one asset category to

do well often cause another asset category to have average or poor returns. By investing in

more than one asset category, you'll reduce the risk that you'll lose money and your

portfolio's overall investment returns will have a smoother ride. If one asset category's

investment return falls, you'll be in a position to counteract your losses in that asset category

with better investment returns in another asset category.

One of the most important ways to lessen the risks of investing is to diversify your

investments both among asset categories and within asset categories. Its common sense:

don't put all your eggs in one basket. By picking the right group of investments, you may be

able to limit your losses and reduce the fluctuations of investment returns without sacrificing

too much potential gain.

Youll be exposed to significant investment risk if you invest heavily in shares of your

employers stock. If that stock does poorly or the company goes bankrupt, youll probably

lose a lot of money (and perhaps your job).

4. Create and maintain an emergency fund.
http://www.sec.gov/investor/pubs/assetallocation.htmhttp://www.sec.gov/investor/pubs/assetallocation.htmhttp://www.sec.gov/investor/pubs/assetallocation.htmhttp://www.sec.gov/investor/pubs/assetallocation.htm


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Most smart investors put enough money in a savings product to cover an emergency, like

sudden unemployment. Some make sure they have up to six months of their income in

savings so that they know it will absolutely be there for them when they need it. During a

downturn of the economy, this is particularly important.

5. Consider dollar cost averaging.

Through the investment strategy known as dollar cost averaging, you can protect yourself

from the risk of investing all of your money at the wrong time by following a consistent

pattern of adding new money to your investment over a long period of time. By making

regular investments with the same amount of money each time, you will buy more of an

investment when its price is low and less of the investment when its price is high. Individuals

that typically make a lump-sum contribution to an individual retirement account either at the

end of the calendar year or in early April may want to consider dollar cost averaging as an

investment strategy, especially in today's volatile market.

6. Consider rebalancing portfolio occasionally.

Rebalancing is bringing your portfolio back to your original asset allocation mix. By

rebalancing, you'll ensure that your portfolio does not overemphasize one or more asset

categories, and you'll return your portfolio to a comfortable level of risk.

You can rebalance your portfolio based either on the calendar or on your investments. Many

financial experts recommend that investors rebalance their portfolios on a regular time

interval, such as every six or twelve months. The advantage of this method is that the

calendar is a reminder of when you should consider rebalancing. Others recommend

rebalancing only when the relative weight of an asset class increases or decreases more than a

certain percentage that you've identified in advance. The advantage of this method is that

your investments tell you when to rebalance. In either case, rebalancing tends to work best

when done on a relatively infrequent basis.

7. Avoid circumstances that can lead to fraud.

Scam artists read the headlines, too. Often, theyll use a highly publicized news item to lurepotential investors and make their opportunity sound more legitimate. This can be

particularly true during troubled economic times when investors are frustrated. The sec

recommends that you ask questions and check out the answers with an unbiased source

before you invest. Always take your time and talk to trusted friends and family members

before investing.
http://www.sec.gov/investor/pubs/askquestions.htmhttp://www.sec.gov/investor/pubs/askquestions.htm


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Example of WARREN BUFFETT

On investing

How warren spends his day:

Wakes up at 6:45, reads paper at home, often doesnt make it into the office until afterthe market opens

No set schedule, WB hates having a full calendar Always takes reading material home Spends 80% of the day reading, 20% talking on the phone (he then said it might be

more like 90/10)

Phone conversations are generally shortInvestment process:

In the past some things were cheap enough WB could decide in a day (this wassomewhat a function of a time period where companies would sell at 2-3x earnings)

Decisions should be obvious to onlookers. You should be able to explain why youbought something in a paragraph.

I dont do dcf (WB says he does a rough approximation in his mind) Finding ideas is a function of cumulative knowledge over time. Something just

comes along usually an event takes place, like a good management team screwing up

that creates the opportunity (WB seems to imply here that his reading isntspecifically targeted at finding ideas, but rather that ideas jump out at him as a natural

consequence of vociferous reading)

You must be patientgood ideas tend to be clustered together, and may not come ateven time intervalswhen you dont find anything for a while it can be irritating

WB isnt bothered by missing something outside his circle of competence Missing things inside the circle is nerve rackingexamples include WMT, FNM


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Review of literature:

Fodor (2008) lack of investor awareness campaigns lead to the financial crime in the capital

market. Like the increase in security enforcement increases the number of arrests. Adversely,

increases in investor awareness campaigns leads to decrease in financial crime.

Al-Tammie and kali (2009) there is a significant relationship between literacy and

investment decisions.

Al-Tammie (2006) the most influencing factors for financial decisions are, in order of

importance-corporate earnings, get rich quickly and stock marketability, past performance of

firms stock, government holdings and creation of organized financial markets. In addition,

religious reasons and family member opinions have least influence.

Baidhya and parajuli (2004) awareness increase amongst the general public about the

capital market, regarding nature of risk and return, through promotional campaigns, seminars,

publications, and programs in fm/TV etc.

Kafle(2007) the stock market is bullish and getting to new peaks, there are numbers of

contributing factors out of them investors awareness on risk return and investment profile is

the one.

Paudyal (2010) Nepal particularly can learn from Indian market in the areas of the

functioning of stock exchange, mutual funds, central depository system of securities,

instruments diversification, investors education and awareness building, adoption of

information technology and opening the secondary market for NRN and foreign

Institutional investors (FIIS).regarding investors education and awareness, India has created

national institute of securities market (NISM) with huge physical infrastructure with the

collaboration of industrial houses and different universities.

Policy research institute (2008) obviously, the financial crisis of 2008has heightened

institutional as well as individual investors awareness of risks.

Christelis et al (2007) policy intervention to improve the quality of financial information and

investors awareness depend crucially on the extent to which cognitive abilities affect

financial decisions.

Ameriks and zeldes (2004) within and across countries there is wide heterogeneity in

stockholding, in particular with respect to investors wealth, education and horizon.

Bogan (2006) there is an association between stockholding and computer and internet use


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Van rooij et al. (2007).there is an association between planning for retirement and financial

education,


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Objectives:

To know the reading habits of the investor. To know the impact of reading in taking investment decisions.

To know ancillaries which help along with reading in taking investment decision


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RESEARCH METHODOLOGY

Research as a care full investigation or enquiry especially through search for new facts in any

branch of knowledge

Research is an academic activity and such as the term should be used in technical sense. The

manipulation of things , concepts or symbols for the purpose of generalizing to extend

,correct or verify knowledge ,whether that knowledge through objective.

Primary Data Collection: The primary data was collected by means of questionnaire and

analysis was done on the basis of response received from the customers.

Secondary Data Collection: The Secondary data refer to those data which are gathered for

some other purpose and are already available in the internal records and commercial, trade, or

government publications. In my project, going through various newspapers, E-magazines, E-

journals and web sites for collecting secondary data.

Research Design

A research design is a definite plan for obtaining a sample from a person who does

investment through reading. The following sample design has been used in the research

study.

DESCRIPTIVE RESEARCH

Descriptive research does not fit neatly into the definition of either quantitative or qualitative

research methodologies, but instead it can utilize elements of both, often within the same

study. The term descriptive research refers to the type of research question, design, and data

analysis that will be applied to a given topic. Descriptive statistics tell what is, while

inferential statistics try to determine cause and effect.

Sample size: - The sample size was so selected that it could be adequate enough to

represent the whole Population. The sample was taken from the Punjab state Jalandhar city,

from that person who does investment through reading. The size of the sample is 100peoples.

Sampling technique

Convenience SamplingA convenience sample is a matter of taking what you can get. It is an accidental sample.

Although selection may be unguided, it probably is not random, using the correct definition

of everyone in the population having an equal chance of being selected. Volunteers would

constitute a convenience sample. This sampling is also known as non-probability


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PROJECT ON IMPACT OF READING IN TAKING INVESTMENT DECISIONS

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