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AN ANALYSIS OF INVESTOR’S CONFIDENCE AND RISK TAKING APTITUDE FROM THE PERSPECTIVE OF INVESTORS’ GENDER AND INCOME IN DERIVATIVES MARKET Mr. Agha Nuruzzaman Research Scholar, Department Business Administration AMU, Aligarh Abstract Derivatives are risk management tools that help an organization to effectively transfer risk. The Behavioral finance experts have proved it quite well that investment decision making is not a completely rational process. Individuals’ investment decisions are guided by not only their intellectual aspects but also the emotions, desires, prejudices one has. These are some of the essential factors which weave out their goals. Gender, age, income, education, wealth and marital status of individuals also influence the investment decision. This paper investigates how gender and income of retail investors affect their investment decisions in futures market in India. The study employs primary data collected from a sample of 411 retail investors who trade in futures and options with the help of a structured questionnaire. The survey was carried out in Delhi and NCR during March- November 2010. SPSS tools were used to analyze the data. The results indicate that gender and income were found to be significant factors impacting the trading behavior of retail investor in Indian futures market. Money makes men more confident and a risk taker. Key Words: Gender, Income, Confidence, Risk attitude, Futures INTRODUCTION Derivatives are risk management tools that help an organization to effectively transfer risk. Derivatives are instruments which have no independent value. Their value depends upon the underlying asset. The underlying asset may be financial or non-financial. Investor’s behavior comprehension happens to be a complex thing. Economists, socialists and psychologists have all attempted to explain investor behavior in various ways.Economists’ enquiry into investor behavior has focused largely on the ‘rationality’ or irrationality’ of investor decision- making processes. Sociologists explain investor behavior by focusing on investors’ social environments. They suggest investors may be trying to enhance their stature within a group or society in general. Investors may thus, be labeled variously as over confident, sophisticated, or proud etc. Undoubtedly, there is a lot of overlapping between the disciplines. Indian derivative market is mainly driven by Institutional investor, Retail investor and Proprietary. In 2009-10 their participation was 13.61%, 54.86% and 31.635 respectively in terms of traded volume. We find retail investors playing a remarkable role in Indian derivative market. The Futures and Options segment of NSE witnessed huge increase in volumes during 2009-10 and continued to achieve a commendable place on the international front. In the year 2009 NSE ranked as the seventh largest derivatives exchange in the world, the second largest exchange in single stock futures and stock index options and the third largest in the stock index futures category. As their numbers have exploded, it has become increasingly more important to understand the minds, motivations, and decision-making styles of individual investors. The derivatives trading in India commenced on June - 2000 with futures trading on S&P CNX Nifty Index, and Sensex Index. Subsequently, the product base has been increasing. The derivatives trading system in India provides a fully automated screen-based trading for all kind of derivative products available on stock exchange on a nationwide basis. It supports an anonymous order driven market, which operates on a strict price/time priority. It provides tremendous flexibility to users in terms of kinds of orders that can be placed on the system. Figure-1: Business growth of Futures & Options Source-NSE Fact Book- 2010 Figure-2: Participant wise Futures & Options turn over during 2009-10 Source-NSE Fact Book- 2010 LITERATURE REVIEW Hira (1987), Xiao (1995) examined ten household assets by family demographic variables, and the Chi-square tests indicated that income was a major factor but besides that age, education, employment status, household size, marital status, and several other variables too influenced the ownership of the assets. Hong et al., (2001), Harrison et al., (2004) found in their studies that stock-market participation is influenced by social interaction. According to them any given “social” investors finds the market more attractive when more of his peers participate. Barber & Odean (2001) argued that the relationship between gender and trading activity is due to the greater overconfidence of men. Rajarajan (2003) found the level of risk bearing capacity increases with increase in income levels. Risk bearing capacity also influenced by the investors house hold size, occupation of investors, employment status. Reley and Chow contended (1992) that “relative risk decreases with age- but only up to a point. After the age of 65 (retirement), risk aversion increases with age. Greenwood & Nagel (2006) found that younger investors were more likely than older investors to buy stocks at the peak of the Internet bubble, the inexperienced retail or individual investor is more likely than the professional to be subject to sentiment. Jaffar & Namasivayan (2006) argued that the investors in the age group of below 35 years actively participate in the speculative trade whereas the age group above 55 hesitate to take risk and males are more interested than females to invest their money in share market or risky assets. Shylajan & Marathe (2006) identified the factors that affect the attitudes and trading behavior of stock market investors as obtained from factor analysis is as: Confidence level that an investor has in himself as compared to informal sources, control over his investments, risk taking ability, confidence of the investor as compared to formal sources such as financial analysts and advisors, expectation to perform better than the stock market, short-term investment attitude. These are some of the factors on the basis of which an investor goes ahead and invests in the stock market. Mittal & Vyas (2007), through their study provides evidence that the investment choice depends on and is affected by the demographic variables. People with low income like to invest in post office/banks (low-risk), middle income investors like mutual funds (medium risk), while people with high income prefer equities (high risk). Myers (1999) classified investors as either: cautious, emotional, technical, busy, casual or informed. Mittal & Vyas (2008) reveal that the Indian investors can be classified into four dominant investment personalities- casual, technical, informed and cautious. Casual investors prefer high risk investment, cash equivalent and other low risk investment are preferred by technical and cautious investors. Informed investors like moderate risk- moderate return investments. OBJECTIVES To study the influence of gender on retail investors’ confidence and risk taking attitude in Indian derivatives trading To study the influence of income on retail investors’ confidence and risk taking attitude in Indian derivatives market METHODOLOGY Primary data collected by communicating with the participants through a structured selfadministered questionnaire were used to conduct the study. The responses were measured on a seven-point Likert scale, with one being ‘strongly disagree’, and seven being ‘strongly agree’. Before undertaking the survey, pilot test of the questionnaire was undertaken with 65 respondents. The reliability also checked through Cronbach’s alpha, and all the values were found more than 0.7 (shown in table-2). Finally the respondent views were incorporated in the final questionnaire administered to 650 investors and 411 questionnaire were taken for this study because some of the questionnaire were had one or more missing responses. The survey was carried out in Delhi and NCR during March- November 2010. The broad structure of the questionnaire is given below. There are some important dimensions which are effected by retail investors’ demographics in trading behavior. The behavioral finance area revealed five main constructs that drive investor behavior: Investment horizon, Confidence, Control, Risk attitude, and Personalization of loss. This paper tries to find out the influence of gender and income on retail investors’ confidence and risk taking attitude in futures trading. Confidence: I expect my Futures contracts to perform better than the other Futures contracts. I feel more confident in my own investment opinions over opinions of friends and colleagues. I am an experienced Stock Index Futures trader. I feel more confident in my own investment opinions over opinion of financial analysts and advisors. I am likely to purchase Futures that have been recommended by friends or colleagues. Stock market fluctuations as reported by the media do not bother me. I am very comfortable to understand the Stock Index Futures products, services, opportunities & challenges. I feel competent enough to trade in the Futures markets. Risk taking Attitude I am prepared to take greater risk in order to earn greater return in Index Futures Trading. I feel more comfortable taking risks when my trade contracts are performing well. In table-1, the reliability test showed the values of Cronbach’s Alpha. Both the values are greater than 0.06, this indicated that the questionnaire used for this study is reliable. Table-1: Reliability SN Dimensions 1 Confidence 2 Risk Attitude No. of Items 8 2 Cronbach's Alpha 0.799 0.701 Figure-3: Proposed model Gender Confidence Behavior of Retail Investor Income Risk taking attitude Source: Prepared by the scholar HYPOTHESIS To study the impact of gender and income of retail investors’ in their futures trading behavior following hypotheses were framed and tested statistically H01: There had been no significant variation of confidence as a dimension of retail investors’ behavior with gender. H02: There had been no significant variation of risk taking attitude as a dimension of retail investors’ behavior with gender. H03: There had been no significant variation of confidence as a dimension of retail investors’ behavior with income. H04: There had been no significant variation of risk taking attitude as a dimension of retail investors’ behavior with income. ANALYSIS The analysis of data was carried out using Statistical Package for the Social sciences (SPSS) 18.0 for Windows. The statistical tests employed were: T-Test, ANOVA and Post Hoc test. To analyze the impact of retail investors’ gender on confidence we used group statistics and ttest, and the results summarized in table-3, given below: Table-2: T-Test Hypothesis N Mean Std. tSig. Remark Dev values H01: There has been no Male- 330 5.664 .4438 14.452 .00* Not significant variation of Accepted Female81 4.885 .3948 confidence as a dimension of retail investors’ behavior with gender H02. There has been no Male- 330 5.8439 .72349 8.090 .00* Not significant variation of risk Accepted attitude as a dimension of retail Female- 81 5.1235 .69611 investors’ behavior with gender. *Indicates significant values at 5% level Table-2: Showed the descriptive statistics of the respondents and also the results of hypotheses H01 and H02. Hypothesis-1: It showed the mean value obtained by male and female on confidence as a dimension of retail investors’ behavior. The mean value and standard deviation of male are 5.66 and .44 respectively. However mean values of female is 4.88 and standard deviation is .39. This showed difference in the mean value between male and female. This has been observed that tvalue is =14.45 and significance (sig) value is .00 which is less than α =.05, hence there has been a significance variation in the mean score of confidence as the dimension of retail investor behavior with the gender of an individual respondent. Hypothesis-2: It showed the mean value obtained by male and female on risk attitude as a dimension of retail investors’ behavior. The mean value and standard deviation of male is 5.84 and .72 respectively. However mean values of female is 5.12 and standard deviation is .69. This showed difference in the mean value between male and female. This has been observed that tvalue is =8.09 and significance (sig) value is .00 which is less than α =.05, hence there has been a significance variation in the mean score of risk attitude as the dimension of retail investor behavior with the respondents gender. To analyze the impact of retail investors’ income on confidence and risk attitude we apply descriptive analysis, ANOVA and Post Hoc Test and the summaries of the obtained values were given belowTable-3: Summary of mean values with respect to Income S.N Income slabs N Confidence (Mean) Risk Attitude (Mean) 1 2 3 4 Upto 300000 110 4.9239 5.0318 300001 to 600000 141 5.5443 5.6135 600001 to 900000 107 5.8575 6.1822 Above 900000 53 5.9434 6.3585 Total 411 5.5113 5.7019 Table-3: From the analysis, we found that as the income of the retail investor increases, the mean values of confidence increase, which indicates that confidence level of retail investor increases as the income of the investor increases. In the case of risk attitude also, the mean values are increasing with the increase of income, this shows that risk attitude increases as the income of the retail investors increases. Table-4: Post Hoc test summary among the different level of income groups Respondents yearly income Confidence (Sig.) Risk Attitude. (Sig.) Upto 300000 and 300001 to 600000 .000* .000* Upto 300000 and 600001 to 900000 .000* .000* Upto 300000 and Above 900000 .000* .000* 300001 to 600000 and 600001 to 900000 .000* .000* 300001 to 600000 and Above 900000 .000* .000* 600001 to 900000 and Above 900000 .513 .300 *Indicates significant values at 5% level The above table-4, shows all significant values among all the income group for the dimension confidence and risk attitude except in between the income group 600001 to 900000 and above 900000, where the values are insignificant for both confidence and risk attitude. Table-5: Summary of ANOVA statistics S. N Dimension Variable Hypothesis F- Value Sig. Remark 1 Confidence Income 147.597 .000* Not Accepted H03 2 Risk Attitude Income 90.653 .000* Not Accepted H04 *Indicates significant values at 5% level Hypothesis H03 (Confidence & Income), is rejected as the significance value is .000 which is less than .05, hence there has been a significance variation in the mean score of confidence as the dimension of retail investor behavior with income. H04 (Risk taking attitude & Income) is rejected as the significance value is .000 which is less than .05, hence there has been a significance variation in the mean score of risk attitude as the dimension of retail investor behavior with income. CONCLUSION The present study found that gender and income of retail investor had significant influence in their trading behavior in futures market. Male are more confident than female in their trading behavior. Males are taking more risk than females in futures trading. Income is an important factor, which affect the confidence and risk taking attitude of the retail investor. As the income of the investor increase the confidence and risk taking attitude of retail investor increases in futures trading. Money makes man more confident, it can help him evolve as a stronger risk taker. The above finding could help brokers and financial advisors selectively target and communicate to their investors/traders. This may also help retail investors to understand their own trading habits and encouraging successful investment growth. References Kumar, A & Lee, C.M. C. (2006), “Retail Investors Sentiment and Return Comovements”, The Journal of Finance, Vol. LXI, No. 5, October 2006), 2451-2486. Barber, B.M. & Odean, T. (2001), “Boys will be Boys: Gender Overconfidence, and Common Stock Investment”, Quarterly Journal of Economics, Vol. 116, 261-292.) Ben, C.U & Joakim, W. 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