ABSTRACTFinance, 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 studyinvolving 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.
KEYWORDS:Financial market, Stock Exchange,Primary and Secondary Markets, Capital markets. Tracing the origin of finance, there issubstantiation to demonstrate that it is as old as human life on earth.Originally a French word, it was adopted by English Speaking communities tomean” the management of money” which is in the modern era organised as a branchof economics. According to academicians, “finance is the procurement andeffective utilisation of funds. It also deals with profits that adequatelycompensate for the cost and risk borne by the businesses”.
Finance, the scienceof money management and the actual process of acquiring the adequate quantum ofrequired funds encompasses the oversight creation and study of money, bankingcredit, investments, assets and liabilities that makeup financial systems. Basicconceptuality of finance comes from one of the fundamental theories i.e. timevalue of money, which essentially states that a rupee today is worth more thana rupee in the future. Since individuals, businesses and government entitiesneed funding to operate, the field is often separated into three mainsub-categories: personal finance, corporate finance and public (government)finance.Creating physical assets with the money, carrying on operating businessactivities and acquiring financial securities are all commitments of monetaryresources at deferent times with an expectation of economic returns in thefuture.The best optimal mix of funds in order to obtain the desired anddetermined results respectively out of the owned funds and borrowed funds shallnot result in loss of profitsto the entrepreneurs thereby recovering the costof business entities effectively and efficiently. Internal controls/checksmaintained in the work place are set off rules and regulations framed at theinception stage of the organisation and is altered depending upon businessesrequirement with better futuristic decisions involving quantitative analysis ofthe organisation serves as an indicator of sectorial growth and desiredreturns.
The fund raising process involves a number of stages, during the courseof which a company appoints pivot financial advisors to deliver the objectivesand goals of the company with having an access to a network of contactsincluding financial institutions, private equity investors, venture capitalistsand debt financing investors. LITERATUREREVIEWInvestments are made with an avowed ofmaximizing the wealth. Investors need to make rational decisions for maximizingtheir returns based on the information available by taking judgments free fromemotions (Brabazon.T, 2000).Investment decisions are also affected by investor’s psychology. Investors makeinvestment decisions before outcomes are certain.
Psychologists have found thatas decisions become more difficult and involve higher levels of uncertainty thedecisions tend to be more greatly influenced by emotions and feelings (Cianci, 2008).Investors often want tohold a stock until it goes back up to the price paid for it no matter how longit takes. Such a decision is based not much on the opinion that the stock is agreater investment opportunity for them but more on the desire to avoid thatawful feeling associated with admitting mistake successful investors are ableto understand and overcome these adverse psychological influences (Iyer B and Baskar RK, 2002).Investorsin various places acknowledge the role of emotions in investment decisionmaking and their empirical results suggested that the demographic factorsinfluence the investor’s investment decisions (Shanmugasundaram V and Balakrishnan V, 2010). RESEARCHMETHODOLOGYThe research paper is an attempt ofexploratory research based on the secondary data sourced from journals,internet, articles, literatures, newspapers, previous research papers. Keepingin view the requirements of the objectives of the study, the research designemployed for the study is of descriptive nature. Focusing on the determinedobjectives strictly, the research design was adopted to have greater precisionand in-depth analysis of the research study. Available secondary data wasextensively used for the study.
The investigator procures the required datathrough secondary survey. OBJECTIVESOF THE STUDY· The contribution of Indian capitalmarket towards the provision of medium and long-term finance to the deficientunits.· To trace the retail investor’sparticipation in the equity capital market over the past few years.· Tostudy the socio-economic profile of theretail investors, investors buying behaviour and practices.· Toassess the fundamental and technicalfactor for understanding the recent performance of the Indian capital market.· The hurdles commonly faced by smallretail investors in the Indian capital market prior to arriving at aninvestment decision.· To recommend for the enhancedparticipation of the retail investors towards the contribution in strengtheningthe financial deepening process in India.
· Tohighlight the steps taken by thegovernment to strengthen the retail investor’s capital base. FINANCIALMARKETThe financial market is a broader termdescribing the mechanism, where trading of securities including the equities,bonds, currencies and derivatives occur. Some large financial markets includingthe New York stock exchange, NASDAQ, Tokyo stock exchange, London stockexchange and the forex markets trade trillions of dollars of securities on anintra-day basis. Financial market prices may not indicate the true intrinsicvalue of a stock due to macro-economic forces.
The prices of securities areheavily reliant on informational transparency by the issuing company to ensureefficient and appropriate prices are set by the market. A financial marketconsists of two major segments: a) Money market and b)Capital Market. MONEYMARKETMoney market is a market for short termfunds, which deals in financial assets whose period of maturity is up to oneyear. The Indian money market consists of RBI (the leader of the money market),commercial banks, co-operative banks and other specialised financialinstitutions like (NBFCs) Non-Banking Financial corporations, LICs, UDIs etc.,Operatingin the Indian money market. Money Market Instruments: Call Money,Treasury Bill, Commercial Paper, Certificate Of Deposit, Repurchase agreement. CAPITALMARKETCapital market is an institutionalarrangement for borrowing medium and long-term funds which provides facilitiesfor marketing and trading of securities. It constitutes all long-termborrowings from banks and financial institutions, borrowings from foreignmarkets and raising of capital by issuing various securities such as stocks,debentures, bonds etc.
It consists of two different segments namely primary andsecondary market. The primary market deals with fresh securities and therefore,also known as new issue market; whereas the secondary market provides a placefor purchase and sale of existing securities and is often termed as stockmarket or stock exchange. PRIMARYMARKETThe arrangement which facilitates theprocurement of long-term funds by companies via making fresh issue of sharesand debentures is usually done through private placement to friends, relativesand financial institutions or by making public issue. The well-establishedlegal procedure involving a number of intermediaries such as underwriters,brokers, etc.
which form an integral part of the primary market, for e.g. Publicsector undertakings such as ONGC, GAIL, NTPC and the private sector companieslike TCS, jet-airways and so on. SECONDARYMARKETThe secondary market also known as stockmarket or stock exchange plays an equally important role in mobilising long-termfunds by providing the necessary liquidity to holdings in shares anddebentures. It provides a place where these securities can be en-cashed withoutany difficulty and delay. It is an organised market where shares and debenturesare traded regularly with high degree of transparency and security. In fact, anactive secondary market facilitates the growth of primary market as theinvestors in the primary market are assured of a continuous market forliquidity of their holdings.
The players in the secondary market includingstockbrokersare the members of the stock exchange who facilitate the trading. DISTINCTIONBETWEEN PRIMARY MARKET AND SECONDARY MARKETThe main points of distinction betweenthe primary and secondary market are as follows;· FUNCTIONS: Whilethe main function of primary market is to raise long-term funds through newissue of securities, the main function of secondary market is to providecontinuous and ready market for the existing long-term securities.· PARTICIPANTS: Whilethe major players in the primary market are financial institutions, mutualfunds, underwriters and individual investors, the major players in secondarymarket are all of these and the stockbrokers who are the members of the stockexchange.· LISTINGREQUIREMENTS: The securities can be dealt with in the secondarymarket, which have been approved for the purpose (listed), there is no suchrequirement in case of primary market.· DETERMINATIONOF PRICE:In case of primary market, the prices are determined by the management with duecompliance with SEBI requirement for new issue of securities and hence,determined by forces of demand and supply of the market and keeps onfluctuating. CAPITALMARKETS VS DEPOSITORY INSTITUTIONSSaving is funnelled from surplus unitsto the deficit units primarily via the capital markets or through depositoryintermediaries. In the first case, intermediation occurs through the exchangeof securities.
The saver invests the proceeds in a financial market instrumentissued by the entity that wishes to obtain the funds. The capital marketsintermediation occurs via wide array of instruments including common andpreferred equities, convertible bonds, corporate bonds, mortgage-backedsecurities, and other asset-backed securities.In the second case in which depositoryintermediaries play a role, intermediation differs in three important respects.First, the investor does not have a claim on the ultimate beneficiary of thefunds.
Second, the price of this claim does not typically fluctuate in responseto the shifts in supply and demand. Third, the investor can not normally sellthis 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 thecase of early withdrawal of a bank certificate of deposit. Regular bank lendingis not usually classed as capital market transaction even when loans areextended for a period longer than a year. An important difference is that witha regular bank loan the lending is not securitized.Another difference is thatlending from banks and similar institutions is more heavily regulated thancapital market lending. Furthermore, bank depositors and shareholders tend tobe more risk averse than capital market investors. All such differences act tolimit institutional lending as a source of finance.
The Difference favouringlending by banks is that the banks are more accessible for small and mediumcompanies and that they have the ability to create money as they lend. ROLEOF RETAIL INVESTORS IN THE CAPITAL MARKETRetail investors play a prominent rolein the capital market along with the foreign institutional investors and domesticfinancial institutions. The retail investors assume greater significancebecause the household savings account nearly 30% of GDP and it is the primesource of funding.
But, it is deplorable that the household investors parktheir savings only 2% to 3% in capital market, perhaps because they have burnttheir fingers in the market scams, manipulations and also on account of thehigher volatility. In accordance with SEBI(disclosure of investor protection)guidelines, retail individual investor is defined as the one who applies orbids for securities of or for a value. However, SEBI has since increased thelimit for retail investors. No study about the securities market will becomplete without the mentioning of investors and stakeholders particularly theretail investors. It becomes the duty ofthe market regulator and other intermediaries to protect the interests of theinvestors. Retail investors are advised to trade with an abundant caution andwith limited amount of capital to undertake the risk.
As retail investors lookfor long-term investment in converse to the FIIs, FFIs, QIBs and HINs play forshort-term games, the government and its various agencies must look after theinterests of the retail investors for building up the strong economy. Higherthe investor’s confidence more is the chances of putting their savings inproductive channels. There is growing concern about the safety and integrity ofcapital market at the international level so as to make the stock market safer,transparent and devoid of frauds and scams. Today, Indian securities market isone of the most robust and vibrant securities market in the world with latesttechnology, shortest settlement cycle, paperless transactions and screen basedtrading system, better corporate governance and faster dissemination ofinformation. However, the retail investors have preferred to invest their hard earnedmoney in other safer modes of investment like bank deposits, insuranceproducts, mutual funds, gold, real estate etc. Although, price manipulations,increased volatility, repeated scams, ineffective corporate governance normsetc.
have been the main reasons for keeping the retail investors away from thesecurities market. Safety of the invested money, liquidity of the instrumentsinvested and return on the investmentare the pivotal objectives while investing.Vibrant securities market ensures that the interests of the investors are takencare of so as to maintain safety of their investments and ability to derivehandsome returns. A strike is needed to balance between raisers of capital andthe interests of investors. Unless and until, we are able to protect theinterests of retail investors the corporate houses would find it very difficultto raise finance over a very long period of time. THECURRENT STATE OF DEVELOPMENT OF LOCAL CAPITAL MARKETSCapital markets have expanded in manycountries in recent decades, especially in emerging markets. For example, totaldebt securities outstanding grew from 47% of GDP in 1994 to 72% of GDP in 2010globally but this was outpaced by a fourfold increase from 13% to GDP in 1994to 54% of GDP in 2010 in upper middle income countries.
Similarly, thecapitalisation of stock markets (relative to GDP) saw an increase of about 50%globally but a more than twofold increase in upper middle income countries overthis period. CHALLENGESIN THE DEVELOPMENT OF CAPITAL MARKETSThe proper functioning of capitalmarkets requires the several preconditions classification into 3 groups: soundmacro-economic policy, strong institutional and legal setting and awell-functioning financial infrastructure. Without this precondition, thegovernment efforts to develop local capital markets are bound to fail,resulting in shallow markets and duped investors and therefore generallyadvisable to sequence financial reforms such that these conditions aresufficiently in place before local capital markets are established. BENEFITSTO THE RETAIL INVESTORS FROM THE CAPITAL MARKETS Wisely taken investment decisions putting intoconsideration the viability of the company, critical analysis of itsfundamentals, past financial performance, management structure, businessenvironment, market competitiveness and other macro environment factors turnsout to be desirable and fruitful.· CAPITALAPPRECIATION: It entails the difference between the purchasingand selling price of a share of a company.
For instance, the buying price isRs.100 per share and the selling price for the same is Rs.150 per share, thenRs.50 per share turns out to be the capital appreciation.· DIVIDENDPAYMENT:Shareholdersare entitled to dividends, if declared.
A sum of money agreed upon by thedirectors of a company to be paid on proportional basis from the company’sprofit in a given financial year.· BONUSISSUE:Shareholders/investors are also entitled to bonus issue, if declared. Hence,entailing a shareholder to acquire additional shares from the company where heinvested in, without necessarily paying for these shares.· PARTICIPATEIN THE RIGHTS ISSUE: Investors are opportune to participatein Rights issue of the company, although rights issues are paid by theinvestors but the price is usually lower than the prevailing market price.· PARTICIPATEIN DECISION MAKING: Right to attend annual general meetingof the company thereby participating in its decision making and exercisingvoting rights.· COLLATRERALFOR OBTAINING LOAN FROM THE BANK:It will interest investors thatthey can use their share certificates as collateral to obtain bank loans forindividual use or business development.· PREPARATIONTOWARDS PERSONAL PENSION PLAN:Buying of stocks could be used asindividual preparation towards personal pension plan, therefore having anopportunity to considerably invest in the stock market during earlier age. CHALLENGESFACED BY THE RETAIL INVESTORS· SMALLINVESTORS:An institutional investor is someone who trades stocks for a living at a bankor other financial institution.
While the small investor is someone with lesscapital invested in the stock market trades for himself, not for a company.Although, small investors generally invest in stocks, mutual funds and indexfunds, investment choices available like options, futures, forwards and swaps areusually too complicated and expensive for small investors. · COSTS:Acompany can negotiate a lower buying price than a family store;large investorsare able to negotiate lower investment fees than smaller investors. Brokeragefirms typically charge a higher percentage for management fees on smallaccounts than on larger accounts. This means as a small investor a higher returnfor the year to break even is the requirement.
Funds that don’t trade often,especially index funds, have very low annual fees.· DIVERSIFICATION:Theinvestment strategy of diversified portfolio across different companies andindustries is less likely to lose money at the same time. As a small investor, it’sharder to build own diversified portfolio due to limitation of availableresource to spread across various industries.· INFORMATION; One other disadvantage fromthe small investor’s point of view is the information asymmetry.Professional investors have research staffs that are constantly providing themwith up to date information. As a small investor, it can feel one step behindour competitors.
However, the internet has made a big dent in thisdisadvantage. While professionals still have an information advantage, theydon’t have nearly the same head start as they did before the internet. FINDINGSAnalysis states a strong negativecorrelation between the number of listed fixed income products available toretail investors and depth of retail trading activity. There has been a higherdegree of substitutability between listed fixed income and equity products. Infixed or partly negotiable fee model environments, reductions in brokerage feesare strongly positively correlated with increase in trading activity. Reducedtrading fees in a market with a non-negotiable fee model has a positiveinfluence levels of trading activity increase in cost-to-trade are associatedwith declines in depth of retail activity as there is a significant negativerelationship between increase in clearing fee and levels of trading activity.Moving from a fixed to a negotiable or even partly negotiable fee model, hasthe effect of reducing cost-to-trade.
SUGGESTIONSThe outcome of this research leads tothe suggestion that the regulators must include the role of behavioural dimensionsin its awareness campaigns due to the criticality of these factors ininvestment decisions. It is recommended that the investment analyst mustincorporate behavioural factors in their analytical model qualitatively. The mediamust create awareness about the behavioural dimensions that are equallyimportant like technical factors. This research also recommends appropriatemeasures to address the genuine apprehensions of the retail investors.
There isneed to increase the retail investor participation and this could be done byincreasing the financial literacy and awareness, expanding the number ofissues, providing diverse investment options, training and increasing the reachof intermediaries, enhancing investor protection measures, simplified norms andcost-effective services. CONCLUSIONIn addition to the usual suggestionabout improving market micro-structure to bring in best practices from internationalmarkets,a few concrete steps that can be taken specifically to facilitate debtinvestments by small investors in India. The small investor’s attitude towardsdebt instruments needs change, and that this will be impossible without aradical overhaul of the small savings schemes in India. There seems to bewidespread misconception about pooled investment vehicles that needs to beremoved as investments such as mutual funds can really fulfil the entire rangeof risk appetite for small investors while increasing the depth and width ofprimary and secondary debt capital markets. Finally some suggestions regardingmarket innovations in terms of a derivative product (Counter Party RiskProtection Security) that may help allay small investors concerns whiletransacting in corporate securities and help fuel growth in these markets.