An Empirical Analysis of Stock Market Participation amongst Indian Urban Middle Class Retail Investors

Abstract

There is considerable empirical evidence that an investment portfolio comprising a healthy allocation to equity linked products is highly beneficial for investors. However, stock market participation levels across countries are still not up to normative standards. India despite its high savings rates and forward looking regulations has very low penetration of equity products. Researchers and policy makers have been befuddled across the world by the so called Stock Market Participation (SMP) Puzzle.Empirical studies have shown that factors like education, income, age, gender, financial literacy, risk tolerance amongst others have shown high correlation with SMP. However, there are no studies pertaining to emerging markets where these factors and their effects on equity participation have been studied together.Stock market participation is an important economic outcome. There can be a substantial welfare loss from not participating in the stock market, as exposure to equities, and hence to the equity premium, may be an important determinant of the long-run return to individual savings (Cocco et al. 2005). Yet, even in the Western World, there is substantial variation in stock market participation between individuals, with many households not holding any stocks at all (e.g. Campbell 2006, Guiso et al. 2008).The main objective of the current study is to understand the factors affecting stock market participation. One more objective of this study is to develop a comprehensive framework to understand the relationship between the various factors and stock market participation. An additional objective is also to investigate whether demographic and socio-economic characteristics affect stock market participation.The Theory of Planned Behaviour (TPB) (Ajzen, 1991) was chosen to be the theoretical underpinning of the research. This theory has found to be useful across several contexts especially where customers are expected to take action based on considerable thought and reasoning.