Financial investment behavior reflects the investor’s perception towards the stock market and other investment avenues. Investment behavior is affected by various factors that can be psychological, sociological, and demographic.
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Investors are the key players in the share market and constitute a higher income. The market regulators can not ignore the behavior of individual investors. Thus, behavioral finance has emerged as a popular field of study. Here is an attempt to explain the irrational behavior of investors towards the stock market.
1. More Cautious Investors
The stock market has enormously grown over the years and undoubtedly an attractive investment avenue for most investors. Investors are more cautious about their investments in the stock market as they know share market investments involve huge risk, and they can lose their hard-earned income, but the risk-reward ratio is also high in the share market. However, sometimes its volatility is the reason for fear for many investors. They can strategize their investments very well with their cautious approach. A study has revealed that the majority of investors make their investment decisions on their own, and only a few get influenced by seminars, advertisements, and newspapers.
2. Stocks Over Mutual Funds
It may surprise you that most investors prefer to invest in stocks compared to mutual funds and derivatives despite being familiar with the level of risk in the share market. It shows that today investors are ready to take a risk. The primary reason for such preference is the most important factor – high returns. Returns percentage can influence every investor’s decision. However, investors must be sure about the performance of the investment avenue they are selecting to earn high returns.
3. Perception, Based on Demographic Factors
Demographic variables can be gender, age group, income group, occupation, and educational qualification of the investors that may influence their investment decisions.
Based on a study, here is an example. There are 16 male participants and 16 female participants to evaluate the influencing ratio for the factors that affect their investment decisions in the stock market.
| Factors that influence stock investment decisions | Male Respondents | Female Respondents |
| Maturity Period | 1 | 0 |
| Capital Appreciation | 3 | 3 |
| Return on investment | 6 | 7 |
| Tax benefits | 4 | 4 |
| Risk | 2 | 2 |
Out of 16 female respondents,
- None investor gets influenced by the maturity period
- For three, capital appreciation matters
- Return on investment is a prominent factor for seven respondents
- Four want tax benefits
- And only two’s decision is affected by the risk involved in the stock market.
Out of 16 male respondents,
- For one investor, the maturity period matters.
- Three investors’ decisions get influenced by capital appreciation.
- Return on investment is an influencing factor for six respondents.
- Four want tax benefits.
- And two investors are influenced by the risk involved in the share market.
4. Maximization of income and minimization of expenses
It is typical rational behavior of retail investors. Maximized income at minimized cost is the main motive associated with an investment. This motive routes them to spare their income between expenditure and savings. It may be one reason to select stock investments over mutual funds as fund managers charge high fees for their services.
5. Source and Level of Awareness
The growth of the stock investments can be credited to awareness. In today’s tech world, good researchers with a quest for learning can find more and more about the stock market. However, the source of awareness and the level of awareness both are responsible for an investor’s attitude towards the stock market. An aware investor rarely gets influenced by a promotional offer to invest.
The theory of behavioral finance shows that the perception and behavior of the investors towards the stock market changes from time to time due to its volatility.