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The factors influencing individual investors behavior in vietnam stock exchange luận văn thạc sĩ

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HOCHIMINH CITY

Phùng Viết Nhiên

THE FACTORS INFLUENCING
INDIVIDUAL INVESTOR’S BEHAVIOR
IN VIETNAM STOCK EXCHANGE
MASTER’S THESIS

In
Business Administration
Ology code: 60.34.05
Supervisor
Professor- Dr. VÕ THỊ QUÝ

Ho Chi Minh City 2010


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Acknowledgement

This research project would not have been possible without the support of many
people. Firstly I wish to express my deep sincere gratitude to my supervisor, Dr. Vo
Thi Quy for her invaluable advices and helps. Without her, this thesis could not have
been completed.
I would like to express my deepest gratitude and honor to my dear parents for
not only the love they devote to me but also for the time I took from them which
should have been my devotion to them in their aged time.
Special thanks to my wife’s assistance in this study. She has encouraged me and
helped me in English editing.
My thanks would also go to all of my colleagues from Nguyen Tat Thanh
college, my classmates, especially, Lam Hong Phong, Nguyen Thanh Trung and Ms
Dang Hai Yen, Ms Nguyen Nhu Chang for all of their friendship and encouragement.
Finally, I also wish to thank my friends in Ocean Security, Dai A Security, Nhat
Viet Security, Vietcombank, HSBC, National university… for their great support. My
thanks would also go to the respondents, without them, my thesis could not have been
done.

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1

Abstract

This paper aimed at identifying the most and the least influencing factors on the
Vietnamese investor’s behavior. Base on Al-Tamimi’s questionnaire, this research
developed a modified questionnaire. The questionnaire included thirty items that
belong to five categories: self-image/firm-image co-incidence, accounting information,
neutral information, advocate recommendations, personal financial needs.
This study was carried out in 226 individual investors in Hochiminh stock exchange.
The results showed that Vietnamese individual investors select stock base on some
factors. The most interested factors were Condition of financial statements, Expected
corporate earnings, Expected profit from stock, Reputation of the firm,
Fluctuation/developments in the VN stock index, Government's policy (tax, monetary,
interest rate), Current economic indicators (such as GDP, inflation..), Affordable share
price, Firm status in industry, Expected dividends. The least factors were related to
advocate recommendations such as Self-company recommendation, Friend or family
member opinions, Opinions of the firm’s stockholders, Broker recommendation,

specialist recommendation, and Security company’s recommendations. Factors namely
Fluctuation of gold's price, Minimizing risk, Fluctuation of dollars' price, Feelings for a
firm's products and services, Reputation of the firm's shareholders or leader are also the
least influencing factors on investor’s behavior.

Key word: individual investor’s behavior.

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TABLE OF CONTENT
-----------Chapter 1: INTRODUCTION
0

1.1 Introduction ....................................................................................................... page 1
1

1.2 Research background ........................................................................................ page 1
2

1.3 Problem statement ............................................................................................ page 3
3

1.4 Research objective ............................................................................................ page 3
4

1.5 Scope and methodology of the study ................................................................page 3
1.6 Contribution ......................................................................................................page 4
1.7 Structure of the study ........................................................................................page 4
5

Chapter 2: LITERATURE REVIEW
6

2.1 Introduction ........................................................................................................ page 6
7

2.2 Some of related theory ....................................................................................... page 6
8

2.2.1 The concept of investors ......................................................................page 6
2.2.2 Security Selection: the Treynor-Black model ......................................page 7
2.2.3 Security analysis ..................................................................................page 8
2.2.4 Technical analysis and Fundamental analysis ...................................page 13
2.3 Previous researches ........................................................................................... page 15
9

10

11

2.4 Research question .............................................................................................page 25
2.5 Conclusion ........................................................................................................page 25

Chapter 3: METHODOLOGY
3.1 Introduction .....................................................................................................page 26
12

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3.2 Research design ................................................................................................page 26
3.3 Develop questionnaire ......................................................................................page 29
3.4 Pilot test ............................................................................................................page 31
3.5 Main survey .....................................................................................................page 32
3.6 Conclusion .......................................................................................................page 34
13

Chapter 4: DATA ANALYSIS AND FINDINGS
14

15

16

17

18

4.1 Introduction ......................................................................................................page 35
4.2. Descriptions of sample ....................................................................................page 35
4.3. Exploratory factor analysis (EFA) .................................................................page 37
4.4. Reliability testing ............................................................................................page 40
4.5. The most and the least factors influence on investor’s behavior ....................page 42
19

20

21

4.5.1 Effect of 8 groups of variables on investor’s behavior.......................page 42
4.5.2 Effect of separate variables on investor’s behavior ...........................page 48

4.6 Conclusion ........................................................................................................page 53

Chapter 5: CONCLUSIONS AND IMPLICATIONS
22

23

24

5.1 Introduction ......................................................................................................page 56
5.2 Summary of the study ......................................................................................page 57
5.3 Implications of this study .................................................................................page 58

5.4 Conclusions of this study .................................................................................page 61
25

5.5 Limitations and recommendations for further research ...................................page 61

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LIST OF REFERENCES ............................................................................................page 62
Appendix 1 – Questionnaire (Vietnamese version) ....................................................page 65
Appendix 2 – Observed variables .................................................................................page 68
Appendix 3 - Descriptive Statistics of variables .........................................................page 69
26

Appendix 4 – Compare mean of variables ...................................................................page 70

LIST OF FIGURES
27

28

29

30

31

32

33

Figure 1.1. Outline of chapter 1 ......................................................................................page 1
Figure 1.2. Structure of the study ....................................................................................page 5
Figure 2.1. The structure of Chapter 2 ...........................................................................page 6
Figure 3.1. Outline of chapter 3 ....................................................................................page 26
Figure 3.2. Research process .........................................................................................page 28
Figure 4.1. Outline of chapter 3 ....................................................................................page 35
Figure 5.1 – Outline of chapter 5 ..................................................................................page 56

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LIST OF TABLES
Table 2.1: The factors influencing on equity selection process of individual investor in
USA in Nagy’s research .................................................................................................page 17
Table 2.2: The factors influencing on equity selection process of individual investor in
Greek in Merikas’ research ............................................................................................page 19
Table 2.3: The factors influence on individual investor behavior in UAE in AlTamimi’s research ...........................................................................................................page 23
Table 3.1: The measurement of scale of variables in this research ...........................page 30
Table 4.1 – Sample characteristics .................................................................................page 36

Table 4.2 – KMO and Bartlett's Test ....................................................................page 38
Table 4.3: Rotated component matrix .........................................................................page 39
Table 4.4: Reliability of the measurement instrument ................................................page 40
Table 4.5: Frequency Distribution of Variables that Significantly Influence the
Vietnamese behavior ........................................................................................................page 43
Table 4.6: Multiple Comparisons of groups ................................................................page 47
Table 4.7: Descriptive Statistics of variables ...............................................................page 49
Table 4.8: The most influencing factors on Vietnamese investor’s behavior .........page 51
Table 4.9: The least influencing factors on Vietnamese investor’s behavior ..........page 51
Table 4.10: The most influencing factors in this research, Nagy, Merikas and AlTamimi ..............................................................................................................................page 52
Table 4.11: The least influencing factors in this research, Nagy, Merikas and AlTamimi ..............................................................................................................................page 55

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2

9

Chapter 1: INTRODUCTION

1.1 Introduction
This chapter portrays general introduction for the current study with which

research problem, research objectives and research questions are provided as the
rationale for this study. An introduction to the research methodology to be used and the
scope of the study is also addressed in this chapter. At the end of the chapter, the
structure of this study is provided. The Outline of this chapter is shown in figure 1.1
45

10

Figure 1.1. Outline of chapter 1

1.1

Introduction

1.2

Research background

1.3

Problem statement

1.4

Research objectives

1.5

Scope and Methodology

1.6

Contribution

1.7

Structure of the study

1.2 Research background
The Vietnam Stock Exchange (VSE) was established in 2000. At that time,

trading in the stock market was operated only at the HoChiMinh Stock Exchange
(HOSE), market is expressed through VN index. Initially, two equity issues were

1


listed, Refrigeration Electrical Engineering Joint Stock Corporation (‘REE’) and
Saigon Cable and Telecommunication Material Joint Stock Company (‘SACOM’).
Until 2005, there were only 41 equities issues listed. During that period VN index
fluctuated erratically, sometime it raised up to nearly 600 score sometime it fell down
nearly 100.
As of 2006, particularly in end-year half, quantity of listed companied increased
quickly, 196 companies were listed at the end of 2006. In total there were thirteen
licensed securities companies. Along with rising of listed companies, VN index
increased continuously from 600 in middle to nearly 1000 at the end of 2006. Not stop
at that point, with the event that Vietnam joined to WTO at the end of 2006, the stock
market really broke out. The market was hot continuously regardless of the warning of
experts and pinnacle of VN index was 1170 on 13/03/2007.
There had been 249 companies listed on stock market until 2007. Of these, 138
are at HOSE, left ones are at Hanoi Stock Exchange (HNX). With 249 being listed,
market capitalization is about 491 billions VND, equivalent to 30 billion US dollars.
Comparing Vietnam market capitalization to other stock markets of developed
countries, perhaps Vietnam market is not worth considering. However, 30 billion US
dollars market capitalization is equivalent to 43% GDP of the whole nation that would
be significant to Vietnam.
Over 9 years of establishment and development, in general, the market has
positive contribution. The Vietnamese Stock market have experience strong
fluctuation: from over 1100 on 13/03/2007 down to over 250 point in the beginning of
2008. During this time, at the cheapest (over 250 point), some investors are hesitant to
buy stock but at the highest (over 1100 point), some investors fight to buy stock. So
what make investors buy and/or sell stock? Which factors influence investor’s
behavior?

2


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1.3 Problem statement
Vietnam security market had the highest growth rate in the Asia Pacific in 2006

with 145%, even higher than Sanghai security market with 130% growth rate. And at
early 2007, VN security market continuously increased with 46% - the highest growth
rate in the world. This fierce increase of VN market made shock to not only many
domestic investors but also security experts including market control officers. Along
with this, the worry about risk of forming buble in the security market had been a
controversial topic.
A lot of reasons had been made to explain too hot development of VN security
maket. Domestic investors blamed for foreign investors, foreign investors blamed for
domestic investors’ “craziness”. However, in general most of people supposed that
main reason was “herd psyshology behavior”, crowd psychology investment of
domestic

investors

–lack

of

knowledge

and

personal

expectation.

( http://www.saga.vn/view.aspx?id=2953). Is it right? So what factors affect on
34

Vietnamese individual investors’ behavior?

12

1.4 Research objective

The purpose of this study is examining the most and the least influencing factors on the
Vietnamese individual investors’ behavior.
13

1.5 Scope and methodology of the study

1.5.1 Scope of the study
The Ho Chi Minh Stock Exchange have more listed company and trading
volume than Hanoi Stock Exchange, so my study just focuses on individual investors
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at the Ho Chi Minh City Securities Center. Therefore they may not represent for all
individual investors in Vietnamese Stock Exchange
1.5.2 Research Method

3


This study was conducted with two phases: a pilot test and the main study. In
the first phase, a qualitative approach was employed in order to explore whether the
scale for measuring the constructs of factors influencing individual investor’s behavior
in HOSE. Some amendments have been made where needed. This step was carried out
by using group discussion techniques.
A quantitative approach was then used in the second phase. Data was collected
by interviewing individual investors at several Securities Companies. The purpose of
this phase was to re-assess the reliability of the measurement scales using Cronbach
alpha coefficient and Exploratory Factor Analysis (EFA). SPSS software version 16.0
was used for data analysis. Chapter 3 will discuss the methodology for this study in
more detail.
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1.6 Contribution
The study is important for individual investors, companies listed in Vietnamese

Stock market. For both local and international investors, the factors influencing on
individual investor’s behavior is the most important because this would affect their
profit in future. Foreign investors might also need to know the most influencing factors
on the Vietnamese investor’s behavior because they are allowed to hold shares of the
Vietnamese listed companies and they invest in Vietnamese stock Market. For
companies, identifying the most influencing factors on individual investor’s behavior
would affect their future policies and strategies. Finally, for government, identifying
the most influencing on individual investor’s behavior would affect legislations and the
additional procedures needed in order to satisfy investors’ desires and also to give
more support to market efficiency
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1.7 Structure of the study
The structure of this study is shown in figure 1.2

4


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Figure 1.2. Structure of the study

Chapter 1

Introduction

Chapter 2

Literature Review

Chapter 3

Methodology

Chapter 4

Data analysis and Finding

Chapter 5

Conclusion and implications

5


3

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Chapter 2: LITERATURE REVIEW

2.1 Introduction

The previous chapter introduces an overview of the study background, the rationale of
the study, the research objective and the research questions. These chapter searches and
reviews relevant theories. The aim of this review is to examine which factors influence
individual investor’s behavior and that will be tested in the Ho Chi Minh Stock
Exchange to answer the research questions.
47

17

Figure 2.1. The structure of Chapter 2

2.1

Introduction

2.2

Some of related theory

2.3

Previous research

2.4

Research question

2.5

Conclusion

2.2 Some of related theory

2.2.1 The concept of investors
Institutional investor is a e ntity with large amounts to invest, such as
36

39

37

38

investment companies, mutual funds, brokerages, insurance companies, pension
40

41

42

43

funds, investment banks and endowment funds. Institutional investors are covered by
44

45

46

6


fewer protective regulations because it is assumed that they are more knowledgeable
47

and better able to protect themselves. They account for a majority of overall volume.
48

49

50

51

Opposite institutional investor, an individual who purchases small amounts of
52

55

57

53

54

securities for his/her own account, as opposed to an institutional investor, also called
56

retail investor or small investor. In this thesis, I just considered individual investors.
58

2.2.2 Security Selection: the Treynor-Black model
Jack Treynor and Fischer Black (1973) developed a portfolio construction
model for managers who use security analysis. The investor use security analysis to
construct an active portfolio.
The security analyst must forecast the dividends and earnings that can be
expected from the firm. This is the heart of fundamental analysis, that is, the analysis
of determinants of value such as earnings prospects. Ultimately, the business success of
the firm determines the dividends it can pay to shareholders and the price it will
command in the stock market. Because the prospects of the firm are tied to those of the
broader economy, however, valuation analyses must consider the business environment
in which the firm operates. For some firms, macroeconomic and industry
circumstances might have a greater influence on profits than the firm’s relative
performance within its industry. In other words, investors need to keep the big
economic picture in mind.
Therefore, in analyzing a firm’s prospects it often makes sense to start with the
broad economic environment, examining the state of the aggregate economy and even
the international economy. From there, one considers the implications of the outside
environment on the industry in which the firm operates. Finally, the firm’s position
within the industry is examined. (Bodie-Kane-Marcus: Essentials of investment, page
381)

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However, base on Dimitrios I. Maditinos (2007), in many cases, current
fundamentals-based models fail to explain the past adequately, or predict the future
reliably. Largely as a result of these failures, scholars have started to look beyond
fundamentals to the role of other “non-fundamentalist” influences on financial and
stock markets, including the approach to forecasting taken by practitioners. Goodhart
(1988) finds that the interplay between professional analysts who base their views on
fundamental analysis and those who use the chartist approach can be the catalyst for
market collapses. Shiller (1989) explains excess bond and stock market volatility by
“irrational” patterns of investor behavior and suggests that technical analysis is one of
the important factors that gave rise to the October 1987 international stock market
crash. However, despite the increasing interest in non-fundamental analysis, there is
little evidence about the prevalence and importance of such techniques in practice (Lui
and Mole and Mole, 1998).
To understand clearly, we will study what security analysis is, particularly what
fundamental analysis is and what technical analysis is?
2.2.3 Security analysis
Security analysis is an important activity to support investment decision
making. In the securities investment analysis, two main methods used are fundamental
analysis and technical analysis. Fundamental analysis helps investors to select the
appropriate portfolio structure. Technical analysis help investors choose the time and
stock trading strategies depending on market developments.
The process of securities analysis depends on each investor’s viewpoint.
However, in general, investors can use the analysis process from the top down, bottomup analysis, or a combination of both. In fact, the analysis method according to a topdown process is the most widely applied. Process starts with analyzing the economy-

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society and reviewing about the stock market globally and nationally, and then
analyzing specific industries and finally the analyzing each company separately.
2.2.3.1 The global economy
A top-down analysis of a firm’s prospects must start with the global economy.
The international economy might affect a firm’s export prospects, the price
competition it faces from foreign competitors, or the profits it makes on investments
abroad. Certainly, despite the fact that the economies of most countries are linked in a
global macro-economy, there is considerable variation in the economic performance
across countries at any time.
2.2.3.2 The domestic macro economy
The macro economy is the environment in which all firms operate. In Essential
of Investment page 384, Bodie-Kane-Marcus shows that stock prices tend to rise along
with earnings and ratio of stock price to earnings per share varies with factors such as
interest rates, risk, inflation rates.
The macroeconomic conditions needed to be concern in securities analysis are:
gross domestic product (GDP), unemployment rate, inflation rate, interest rate,
exchange rate, national budget deficit, government policy in the financial-monetary
field. However, there are three most basic macroeconomic factors impacting directly to
the investment activities in stock market, such as exchange rates, interest rates and
inflation rates. The following analyzes their effect in detail.
— Exchange rates: when the investor realizes that the domestic currency can be
devaluated in the next time, the investor will decide not to invest in securities or will
seek to replace the securities with foreign currency assets to prevent stock value
decrease.

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— Inflation is the rate at which the general level of prices is rising. Inflation and
interest rates are two very important factors causing a great impact on investment
decisions in the stock market.
— Interest rates
Bodie-Kane-Marcus said that the level of interest rates is perhaps the most
important macroeconomic factor to consider in one’s investment analysis. Forecasts of
interest rates directly affect the forecast of returns in the fixed-income market. If your
expectation is that rates will increase by more than the consensus view, you will want
to shy away from longer term fixed-income securities. Similarly, increases in interest
rates tend to be bad news for the stock market. Unanticipated increases in rates
generally are associated with stock market declines. Thus, a superior technique to
forecast rates would be of immense value to an investor attempting to determine the
best asset allocation for his or her portfolio. This interest rate is affected by a number
of factors:
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The situation of production and business activities of companies: if

companies operate efficiently, the demand for capital to expand production will be
higher and at the same time there will be many new businesses established. For this
reason, demand for capital is high, thus pushing interest rates higher
9

Expenditure capacity of people: If predictions about the economy have

good growth prospects, people consuming demand will be higher, so they are
willing to borrow to spend, resulting in interest rates may rise.
Macroeconomic environment has an important role to decide the overall trend
of the stock market. Generally, when the economy is in growth phase and prosperity,
the stock market will develop and vice versa when the economy is in recession and
crisis phase, the market will go down.

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Thus, if we can predict development tendency of the economy, then we can
forecast the development trend of the stock market overall. However, the reality
surveys have showed that the actual relationship between the economic situation and
the general evolution of the stock market does not always happen the same way and if
so, they can occur under different directions and orders. In reality, the stock market
over the world actually showed that there have been several fast-growing periods of the
economy, but the stock market has gone down and vice versa.
Sometimes stock price fluctuations occur before changes in the economy,
sometimes occur later. So investors try to predict the economic situation to find out the
peak of the economic cycle and select the time to participate or withdraw from the
stock market.
2.2.3.3 Government policy
Base on Bodie-Kane-Macus (Essential Investment, page 388), government policy have
influent macroeconomic, especially fiscal policy and monetary policy.
Fiscal policy refers to the government’s spending and tax actions and is part of
“demand-side management.” Fiscal policy is probably the most direct way either to
stimulate or to slow the economy. Decreases in government spending directly deflate
the demand for goods and services. Similarly, increases in tax rates immediately siphon
income from consumers and result in fairly rapid decreases in consumption.
Monetary policy refers to the manipulation of the money supply to affect the
macroeconomic and is the other main leg of demand-side policy. Monetary policy
works largely through its impact on interest rates. Increases in the money supply lower
short-term interest rates, ultimately encouraging investment and consumption demand.
Over longer periods, however, most economists believe a higher money supply leads
only to a higher price level and does not have a permanent effect on economic activity.
Thus, the monetary authorities face a difficult balancing act. Expansionary monetary

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policy probably will lower interest rates and thereby stimulate investment and some
consumption demand in the short run, but these circumstances ultimately will lead only
to higher prices. The stimulation/inflation trade-off is implicit in all debate over proper
monetary policy.
2.2.3.4 Industry analysis
Industry analysis is important for the same reason that macroeconomic analysis
is: Just as it is difficult for an industry to perform well when the macroeconomic is
ailing, it is unusual for a firm in a troubled industry to perform well. Similarly, just as
we have seen that economic performance can vary widely across countries,
performance also can vary widely across industries.
At the same time, different industries will have different levels of risk; therefore
it is necessary to assess the risk level of the industries to determine corresponsive
investment returns should be.
Risk of each industry has not much variation over time, so we can analyze the
risk level of each industry in the past to predict its risk in future.
2.2.3.5 Political-social environment
Political, economic and social environment has certain impacts on the operation
of the stock market, may even affect the operation of the entire global stock market.
The change of tax policy, operating rates policy, and monetary policy … will impact
significantly on the activities of companies.
The political situation is very influential to the stock market. Political factors
include changes in government and political-economic activities of many countries.
Political change makes many regulations and government control in some sectors
tightened and in other sectors loosen, resulted in a major impact on business results of
each sector, each company and it is difficult to confirm the tightening or loosening will
create positive or negative effect on the economy.

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Law environmental is also a basic factor to impact the stock market as well.
Government agencies affected the stock market by law and other documents under law.
For example, antimonopoly law often reduces stock price of companies subject to the
law governing. Mergers and acquisitions law may impact negatively or positively to a
group of companies ... Therefore, the legal environment should be considered under
different angles as followings:
— The uniformity of the legal system ;
— The feasibility of the legal system ;
— The effectiveness of the legal system (enough to protect the legitimate rights of
the investor or not, encourage the trading activity or not, enough power to ensure that
securities transactions are safe?)
— The international of the legal system;
— The stability of the legal system
2.2.4 Technical analysis and Fundamental analysis
Technical analysis is based on evaluation of past prices and volume trade of the
stock. Followers of technical analysis are known as chartist as they look at the past
prices of the stock and identify patterns and trends. They do so to forecast through the
charts and prices what the stock will do in the future, and hoping to find pattern they
can exploit to make a profit. The methodology involves studying the supply and
demand in the market to attempt what direction or trend will continue in the future. As
an example of technical analysis, consider the relative strength approach. The chartist
compares stock performance over a recent period to performance of the market or other
stock in the same industry. (Essentials of investments – Zvi Bodie, Alex Kane, Alan
J.Marcus- page 247 to 248)
Fundamental analysis on the other hand involves valuing a company to determine
its fair or intrinsic value. This analysis method uses earning and dividend prospect of

13


the firm, expectations of future interest rates, and risk evaluations of the firm to
determine proper stock prices. Fundamental analysts usually start with a study of past
earning and an examination of company financial statements. They supplement this
analysis with further detail economic analysis, ordinarily including an evaluation of the
quality of the firm’s management, the firm’s standing within its industry, and the
prospects for the industry as a whole. The hope is to attain some insight into the future
performance of the firm that is not yet recognized by the rest of the market. (Essentials
of investments – Zvi Bodie, Alex Kane, Alan J.Marcus- page 247 to 248)
With the information presented which technique technical or fundamental analysis
should be used for trading or investing? Technical analysis does not consider the
qualitative factors which are really important for analytical purposes. Only charts,
indicators and volume analysis cannot completely describe whether the stock is worth
buying or not long term. To gain a long term perspective, fundamental analysis is
recommended as it will incorporate the information that has significant value for an
investor. The information contains both quantitative and qualitative research. However,
when going long on a security from an investment perspective technical analysis will
aid your entry. But, in retrospect the theory behind long term investing takes out the
worry from the day to day volatility and thus fundamental analysis would weigh more
important. If you are looking to trade an asset short term say one day to three months,
fundamental analysis does not really matter unless you are expecting some major news
announcement to take place. In this shorter time frame especially used for option and
leveraged trading technical analysis is very useful and should be understood.
Understanding: price patterns, candle sticks, support and resistance, moving averages
combine with volume and an idea as to what the industry group and overall market is
doing from a technical aspect is necessary to picking your entries and exits.
( http://businesstm.com/investment-traders/technical-analysis-fundamental-analysis59

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whats-the-difference-the-pros-cons/-

March

19,

2010

By

60

Kirk

Paterson

-

BusinessTM.com/Invement-Traders)
In summary, we can see that there are many factors to affect the securities
investment. All the information from publicly available information to inside enterprise
information, such as the accounting information, market information, stock prices in
the past, information relating to the operation of the business, all are reflected in stock
prices. This makes buying and selling stocks professional investors like games of luck.
In stock investment theory, there are two main methods of stock analysis on which the
investors base their investment options, that is fundamental and technical analysis. To
analyze an efficient way, then we will analyze the overall macro-economic situation
such as GDP, inflation..., to information about government policies (taxes, interest
rates, monetary policy ...), then down the information analysis of the security sector,
and final review of accounting information for that stock. In addition, all relevant
information, even information relating to executives, leaders and policies, the
development trend of that company were dissected to examine, in particular it is also of
interest to both trading volume and price of shares in the past for investment decisions
... Thus, investing in a stock is not simple, investors will choose the factors that are
important to analyze when deciding to buy or sell securities? Let's find out in the next
section.
18

2.3 Previous researches
Professor Kahneman found that under conditions of uncertainty, human

decisions systematically depart from those predicted by standard economic theory.
Kahneman, together with Amos Tversky, formulated prospect theory. An alternative to
standard models, prospect theory provides a better account for observed behavior.
Kahneman also discovered that human judgment may take heuristic shortcuts that
systematically diverge from basic principles of probability. His work has inspired a

15


new generation of research employing insights from cognitive psychology to enrich
financial and economic models.
In this section, the results of some empirical studies about individual investors’
equity selection and individual investor behavior will be highlighted. An attention to
the individual investor behavior is the emphasis of this paper.
Nagy and Obenberger (1994) examined which factors had greatest influence on
the equity selection process of individual investors in USA. They developed a
questionnaire including 34 variables and asked 137 participants. And they identified 7
relatively homogenous groups of variables that influenced equity selection process,
called 7 factors, those are “neutral- information”, “accounting – information”, “selfimage/

firm

image

coincidence”,

“classic”,

“social-relevance”,

“advocate-

recommendation”, “personal-financial-need” as illustrated in table 2.1.
Their findings suggested that classical wealth – maximization criteria (expected
earning, diversification needs, and risk minimization) are important to investors, even
though investors employ diverse criteria when choosing stocks. Contemporary
concerns such as local or international operations, environmental track record and the
firm’s ethical posture appear to be given only cursory consideration. The
recommendations of brokerage houses, individual stock brokers, family members and
co-workers go largely unheeded. Many individual investors discount the benefits of
valuation models when evaluating stocks. Almost 40% of individual investors
apparently did not make use of valuation model, even one as readily available as
price/earnings P/E ratio.

16


Table 2.1: Factors influencing the equity selection process of individual investor in
USA in Nagy’s research
Neutral Information

Financial Press Coverage
General Press Coverage
Recent Price Movements
Information from Investment Advisory Services

Accounting Information

Financial Statements
Annual Reports
Prospectuses
Valuation Techniques
Expected Earnings

Self-Image/Firm-Image

Coincidence Firm
Reputation Firm Status
Feelings about Products/Services
Perceived Ethics of Firm

Classic

Expected Dividends
Share Price Affordability
Tax Consequences
Risk Minimization

Social Relevance

Environmental Record
Local Operations
International Operations

Advocate

Recommendations from:

Recommendation

Brokerage House
Individual Stock Broker
Friends/Coworkers

Personal
Needs

Financial Competing Financial Needs
Time before Funds are Needed
Diversification Needs

17


Krishnan and Booker (2002) carried out a study on 106 MBA students in
Pittsburgh University to examine the factors influencing the decisions of investors who
use analysts' recommendations to arrive at a short-term decision to hold or to sell a
stock. Specifically they examined if the presence of analysts' recommendations reduces
the tendency for investors to commit the disposition error, i.e., sell winning stocks too
soon and hold losing stocks too long. They also examined whether the strength of
supporting arguments to the analysts' recommendations affects investor decisions.
Their results indicated that the presence of an analyst summary recommendation report
reduces the disposition error for gains but not for losses. A strong form of the analyst
summary recommendation report, i.e., one with additional information supporting the
analysts' position further, reduces the disposition error for gains and also reduces the
disposition error for losses.
Merikas et al., (2003) investigated the factors that influenced individual investor
behavior in the Greek market. They mailed their questionnaire including 26 variables
to 150 individual behaviors. They found that most of the variables that were rated
important were classic wealth maximization criteria such as “expected corporate
earnings”, “condition of financial statements”, or “firm status in the industry” with
more than half of the respondents considering important. Apart from the wealth
criteria, surprisingly more than half of the respondents considered no other factor
important indicating that investors truly employed diverse decision criteria when
choosing stocks. In addition, speculative factors like “get rich quick”, “recent price
movements in the firm’s stocks”, and “affordable share price” influenced only 1/3 of
the respondents. Finally, environmental criteria like “coverage in the press”,
“statements from politicians and government officials”, “ease of obtaining borrowed
funds” and “political party affiliation” were either totally unimportant to most
experienced stock investors and only a very small percentage of them considers them
significant investment decision criteria. They also analyzed the 26 variables using the

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