Indian retail investors tend to lose in stock markets: ISB

The ISB study found that about 20.2 lakh individual retail investors in India consistently chase a zero rate of return on their stock investments when they make decisions themselves

Retail equity investors in India systematically lose out to other categories of players because they sell the winning stocks too quickly and hold on to the losing stocks too long, reports PTI quoting a study.

 

The study by Hyderabad-based Indian School of Business (ISB) found that individual retail investors in India, numbering 2.02 million - largest in the world - consistently chase a zero rate of return on their stock investments when they make decisions themselves.

 

The study attributed the recurring losses to these types of investors to the 'disposition effect' (selling the winning stocks too quickly and holding on to the losing stocks too long) and 'overconfidence' (taking credit for good decisions and attributing bad decisions to luck) for three categories of investors separately.

 

The study by Hyderabad-based Indian School of Business (ISB) was conducted under the leadership of Sankar De, Executive Director at the Centre for Analytical Finance, ISB.

 

It is based on the daily trade data of 2.5 million retail investors (given by NSE) who collectively carried out 1.4 billion trades, with a total value of Rs37 lakh crore between January 2005 and June 2006, and is touted as the largest sample used in an empirical study in behavioural finance.

 

"We estimate that individual retail investors lost close to Rs83.76 billion during the sample period of 18 months, from January 2005 to June 2006, or Rs55.84 billion per year," De said while releasing the report here today.

 

These losses are equivalent to 0.77% of the country's gross domestic savings a year, said the study titled 'Do retail investors in India make rational investment and portfolio decisions?

 

The findings are based on the NSE data during the period and looked at the behavioural biases, investor performance and wealth transfer between investor groups.

 

"The total number of investors who traded at least once during this period is 2.5 million, or 0.22% cent of the population. Put differently, 0.22% of the country's population lost 0.77% of the total gross domestic savings during this period," De said.

 

The figures are just the trading losses and do not include commissions, taxes and market impact losses, he added.

 

The co-authors of the study, funded by Citigroup and Goldman Sachs foundations, are Bhimasankaram Pochiraju, Naveen Reddy and Rahul Chhabra.

 

Other studies have documented that trading losses capture only 27% of the total losses for individual investors.

 

Assuming the same proportion of trading losses for domestic investors, the total losses for them would be around Rs 207 billion, or Rs 82,800 per investor a year, De said.

 

The study only looked at the secondary market trade conducted by individual retail investors.

 

De said, "An analysis indicates that retail investors increase both buying and selling if their trades in the recent past are marginally profitable or barely in the positive territory, and decrease them if they are unprofitable or in the negative territory, ignoring transactions costs.

 

"Since on an average they lose more than they gain trades of the retail investor end up being value-destroying for themselves and beneficial for institutional investors, who are usually more informed as well as more rational."

 

Staying away from the market at a distance is the right way for investors - implying investing through mutual funds or other platforms could trim losses, he said.

 

What makes retail investors behave this way? The answer lies in two powerful behavioural instincts. "One, their approach to valuation of their investment options is based on feelings rather than careful calculation under which, what matters is the presence or absence of a stimulus, in this case profits, but not the size of the gains (losses).

 

"The second reason is the compelling influence of zero as a goal. The distinction between positive and negative numbers is of fundamental importance to human thought processes in many areas, not just investments," he said.

 

After India, China is home to largest number of retail investors at 1.66 million followed by Finland (1.3 million), US (1.24 million) and Japan (1.17 million).

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COMMENTS

MANOJ KUMAR MONDAL

4 years ago

The broad index the SENSEX has risen from 6555 to 10609 during this period, a gain of 62%. On an average a person would gain 62% in value on a balance portfolio without making any trading during this period without considering the dividends during the interim. Thus the actual loss due to frequent and unnecessary transactions are much greater.

SuchindranathAiyerS

4 years ago

Yer betcher a Kalmadi or a Raja. !!! If somebody makes a profit, it means somebody else made a loss.

Two SpiceJet pilots argued over who should land first

The pilot of SpiceJet flight from Delhi contacted the ATC, saying the Hyderabad flight pilot was arguing with him over landing. In the process, the two aircraft came at a distance of 3,100 feet though they were in the required vertical separation limit

 
Mumbai: Putting the safety of around 160 passengers at risk, two SpiceJet pilots allegedly got into a verbal fight over who should land first, reports PTI quoting sources.
 
The incident had occurred on Thursday at around 7 pm when the Indore ATC cleared the Delhi-Indore flight of SpiceJet for landing. Around the same time, the airline's flight SG 1053 Hyderabad-Indore was also on the approach but was to land after the Delhi flight.
 
"However, the pilot of the flight from Delhi contacted the ATC, saying the Hyderabad flight pilot was arguing with him over landing. In the process, the two aircraft came at a distance of 3,100 feet though they were in the required vertical separation limit," sources added.
 
There were around 160 passengers on-board at the time.
 
SpiceJet spokesperson was not available for comment.
 

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COMMENTS

Shashikant Koppikar

4 years ago

I am a retired pilot. At the out set, let me say unequivocally that if indeed a pilot of one flight was arguing about the landing priority with another pilot, it amounts to gross indiscipline in terms of communication procedures. The "aggrieved " pilot should have lodged a protest with the Air Traffic control, preferably after landing.
Having said that, the reporter's/ editor's intention behind stating that the" aircraft were at a distance of 3100 feet, but they were within the required vertical separation limits" is not understood.
Thank God the usual cliche about " 160 passengers on board had a miraculous escape " has not been used. Unless the precise wording and the length of the arguments between the pilots is known, the source and the reporter is guilty of sensationalizing something which may or may not amount to risking flight safety.

Foreign bank mulled closing New India Assurance account: Finance Ministry

A foreign bank had threatened to close down accounts of state-owned New India Assurance if it did not stop providing insurance cover to ships ferrying oil from Iran

New Delhi: The union government said a foreign bank had threatened to close down the account of state-owned New India Assurance Ltd if it did not stop providing insurance cover to ships ferrying oil from Iran, reports PTI.

 

However, the threat was not executed by the foreign bank, Minister of State for Finance Namo Narain Meena said in a written reply in the Rajya Sabha.

 

"The public sector general insurance companies have not received any such threat except the New India Assurance Co Ltd to whom one foreign bank had threatened to close their account on this issue. However, this bank has now agreed to continue the account," Meena said.

 

The Minister further said that there was no deactivation of account of state-run insurers by foreign banks.

 

He was responding to a query whether several foreign banks had threatened to close the accounts of state-run general insurers if they continue to provide insurance cover to Indian ships ferrying oil from Iran.

 

Insurance regulator IRDA, Meena said, had informed the government that following the restrictions imposed by the United Nations and the European Union, Europe-based insurers had stopped providing cover to ship owners involved in carriage of cargo or oil consignments from Iran-India-Iran and vice-versa.

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