Friends do let friends buy stock actively. The relationship between stock market investment and social interaction

Table of Contents

Acknowledgements.

Abstracts

List Of Tables

Chapter 1: Introduction
1.1 Overview.
1.2 Problem statement
1.3 Background, Objectives and significance of study
1.4 Outline of the Study
1.5 Definitions

Chapter 2: Literature Review

Chapter 3: Research Methods
3.1 Method of Data Collection
3.2 Sampling Technique
3.3 Sampling Size...
3.4 Research Model Developed
3.5 Statistical Technique

Chapter 4: Results.
4.1 Findings and Interpretation of the results.
4.2 Hypotheses Assessment Summary

Chapter 5: Conclusions, Discussions, Implications and Future Research
5.1 Conclusions

References

Appendix

List of Table

4.1 For “Yes, very important”

4.2 For “Yes, somehow important”

4.3 For “No, only investment is important”

4.4 ANOVA Table of “Yes, very important”

4.5 ANOVA Table “Yes, somehow important”

4.6 ANOVA Table of “No, only investment is important”

4.7 Coefficients Table of “Yes, very important”

4.8 Coefficients Table “Yes, somehow important”

4.9 Coefficients Table of “No, only investment is important”

4.10 Information from news or magazines

4.11 Public opinion.

4.12 Company historical financial data

4.13 Company recent information

4.14 Investment advisor

4.15 Friends / family

4.16 High volatility in stock

4.17 Social capital

4.18 Knowledge about stock

4.19 More experience about stock

4.20 Hold on to securities

Acknowledgements

In the name of Allah the Most Beneficent, the Most Merciful, All praise be to Allah that I completed my thesis this year. I am grateful to my parents, for their prayers were a great support in completion of my research work. My parents and family have always been my great support and guide throughout my career success. Additionally I would like to pay thanks to my fiancé and my office colleagues’ specially the finance department and head of department, Mr. Zeeshan Khatri.

It was a successful research study I have learnt a lot through this research and the whole process was a new experience. . I would like to pay thanks to my Instructor Dr. Subhani and co-instructor Ms. Amber who have been my step to step guides in the whole process, without them it would have been impossible. Secondly, I would thank Mr. Furqan who helped me in the process of analyzing and interpretation.

Further I would like to pay my gratitude to those who were a source of information, helped and guided me to find relevant people and collect data; Mr. Mudassir Ahmad, Mr. Islam ul Haq and Mr. Arsalan Raja.

Lastly and most importantly, I would thank all those people who filled out the questionnaires with honesty and equipped me with their right experience and knowledge.

Abstract

This research study is based over an observation about the relationship between stock market investment and social interaction. People believe that an investor enters a stock market through his personal or social relations. My research is the analysis and interpretation of this statement that to what extent it is true or false. Firstly 280 stock market investors were interviewed through questionnaires for this research. The investors included different business men, brokers, employees, old age people etc. then a test were applied which had a dependent and some independent variables. There were 11 independent variables like news and magazines related to stock market, stock experience and knowledge, financial history of a company, variation in stock and similar things like that. The dependent variable was the investing time span. The result showed that there are some things an investor has in his mind before investing and at the initial stage, but as the time span gets longer and he involve in the surroundings he gets to know better and believes less in those superstitious thoughts. Conversely as an investor involves in stock trading then he doesn’t need such type of information. Therefore there had always has been a negative relation between the dependent and independent variables.

Chapter 1: Introduction

1.1 Overview

This research is empirical evidence that a person obviously chooses to enter stock market or gets involved in its activities after hearing the comments of the other person who is already in here. The base of study was that social interaction and behavioral finance in stock market has a relation. When a person takes information and adopts any activity of stock market such as stock price valuation, market performance, benefits of investment, blue chip stock, diversification, dividend and capital gain, etc. through social interaction then he trusts on it and to invest in it.

The level of trust increases due to honesty and clarity between two persons. Trust is very important for any sort of exchange because when one makes a decision to get an uncertain output and when a positive output is gained then the level of trust obviously goes higher. Peter J. Batt (2003) for any exchange of thinking the most important thing is the trust which is inversely proportional to two components; one is “risk” and second is “incomplete information”. If any of the two components is high the trust gets lower. Therefore, In order to build trust the balance in “risk” and “complete information” is necessary and also the trust is vital between two persons doing business with each other. The social interaction is vital to develop knowledge. It can be analyzed through relational dimension or cognitive dimension. The relational dimension is a positive creator as compared to cognitive dimension (A. Chua, 2002). It helps to support socially and emotionally and also develops knowledge to increase information in anything. What cognitive dimension means is that a person develops his knowledge with the help of his experience and his deep thoughts and keeps it updated.

According to K. Prandy (1999), “a person gets satisfaction from his surroundings and he analyzes the class identification through group or individual position or social mobility”. A man also gets involved in stock market activities in order to take his social standard at higher place and also to show off his position in a group he socializes. The stock market index instability is linked with various factors such as positive and negative relationship with someone. As far as the market performance is concerned, it is linked with the individual firm or group firm (Rui T. Dias, 2005). The interest increases in relation to purchase the share with the performance of market and valuation of price. An investor has three aspects of nature, dividend yield, capital gain and natural investor. The investor taking dividend yield invests in the stock of the firm from where he gets the maximum dividend. Capital gain is related to price valuation because people do not take dividend from it but they invest in that firm where the stock prices vary frequently. According to Kevin Chiang (2006), “most of the people are willing to take dividend as compare to capital gain because they invest so that they can get good return”.

1.2 Problem statement

This study is on observation that personal interaction or social relation directly or indirectly influences the person to involve in stock market activities.

1.3 Background, Objectives and significance of study

This study is on observation that personal interaction or social relation directly or indirectly influences the person to involve in stock market activities. People believe that an investor enters a stock market through his personal or social relations. My research is the analysis and interpretation of this statement that to what extent it is true or false. Variables related to social interaction and buying behaviour were used in research and a hypothesis was created for each variable so that the relation of each variable with stock may be known.

H1: Information is gained from news / Magazines before buying the stock activity.
H2: Take public opinion about profit making investment before buying the stock activity.
H3: Mostly rely on company’s historical financial data before buying the stock activity.
H4: Company’s current information is better to consider before buying the stock activity instead of historical information.
H5: Before buying the stock activity consult your investment advisor.
H6: Friends / family have more knowledge about buying the stock activity.
H7: Not to buy the stock activity with high volatility.
H8: Get information through social capital before buying the stock activity.
H9: Get knowledge about stock before buying the stock activity.
H10: More experience about stock is better for deciding the investment in the stock activity.
H11: To hold onto stock activity losing value waiting for better times.

1.4 Outline of the study

This research is based on five (05) chapters and the outline of each chapter is given below:

Chapter one (01) is the overview of research in which the introduction of research is given along with the definitions of problem statement, hypothesis, etc.
Chapter two (02) is based on literature that is the detailed explanation of research work.
Chapter three (03) is based on research method which comprises of data collection and its analysis.
Chapter four (04) shows the result of analysis through interpretation.
Chapter five (05) is the ending or finalization in which conclusions and recommendations are given.

1.5 Definitions

1.5.1 Social interaction:

Trust: Belief in the reliability, truth, or ability of someone or something.

Cognitive: The process of acquiring knowledge and understanding through

consideration, practice, and the senses. Social capital: The interaction among people who live and work in a particular society, enabling that society to function effectively

1.5.2 Behavioral finance:

Investor nature to earn money people makes investments in stock or other places. But the investment in stock is better than other investment instrument.

1.5.3 Stock market activities:

Diversification / portfolio it is better to make more than one investment so that at time of crisis of one business other investments are able to provide better returns. Stock price Investors calculate the price of stock through for dividend and capital gain. Stock return investor expects returns from his investments in stock.

Chapter 2: Literature Review

Stock market is a financial and capital exchange forum where huge amounts of stock are bought and sold every day. There are two fields in stock market activities. One is behaviour of finance in stock and other is social science activities or social interaction. Social network has a great role in every forum; similar is the case with stock market forum where social interaction plays an important role to get involved in its daily activities.

Every investor wants to invest in new places and want its potential return. This desire it seeks by seeing other investors and then thinks of new ideas of how to invest and where to invest. Through social interaction it gets new ideas of investment and is mostly directed towards stock market where it analyses the types of stock and how to invest in them. There are different aspects of social interaction like intension to get involved, trust, social mobility, cognition, relationship, etc... Likewise there are aspects in stock market or behaviour finance, for example buying behaviour, diversification in stock, performance of firm, blue chip concepts and variation in stock.

The level of trust increases due to honesty and clarity between two people. The trust is very important for any sort of exchange because when one makes a decision to get an uncertain output and if a positive output is gained then the level of trust obviously goes higher. When the level of trust is higher than the level of co-operation between parties also gets higher and it lowers the level of risk and uncertainty (Coulter & Coulter, 2002). Empathy, politeness, similarity, customization, competence and promptness have great effect in order to establish trust and build a relationship (Surprenant & Solomon, 1987).

For exchange of idea of any type through any means the most important thing is the trust which is inversely proportion to two components, “risk” and “incomplete information” (Hawes et al., 1989). If “risk” is too much then the trust get weaker and if “incomplete information” is high then also the trust lowers. In order to build trust the balance in “risk” and “complete information” is necessary and also the trust is vital between two persons doing business with each other. If there is trust between two parties then they don’t need information about every little thing (Selnes, 1998), they simply use and follow policies and patterns for understanding (Tomkin, 2001).

Social interaction develops long term relationships in business. This happens when an individual party takes part in any transaction with someone (Hakansson & snehota, 1995). Wilson & Moller (1995), when both parties work jointly in long term relation to achieve their goals, then they are motivated a trust is maintained in relationship. In any buying or selling relation it is important to differentiate between three types of trust i.e., contractual trust, competence trust and goodwill trust (Sako, 1992). Contractual trust is an agreement in which it is deemed that the said transaction will be completed through honesty and compliance. Competence trust is a promise between the parties with an exception that each will do its own work. The Goodwill trust is in business and corporate sector where trust is very important and is built through mutual understanding that no party will take unfair advantage of the other. Trust is a vital part of business for daily transactions and dealings.

When a deeper look was taken at the matter of trust, then it was found that there are different types of theories and concepts of trust depending on the nature and characteristics of project. There are two types of trust in stock market, one is interpersonal trust in which a person gets influenced by another person and trusts him to invest in stock market. The other is institutional trust, where a person relies on a financial institution for his investments, not knowing where his money is being invested; he is satisfied with his required return. In both cases the individual is concerned with two things, his investments and their potential return. About which he gets the idea from social interaction.

The social interaction is vital to develop knowledge. The social interaction can be analyzed through relational dimension or cognitive dimension where the relational dimension is a positive creator as compare to cognitive dimension (A. Chua, 2002). It helps to support socially and emotionally and also develops knowledge to increase information in anything. What cognitive dimension means is that a person develops his knowledge with the help of his experience and his deep thoughts and keeps it updated. According to K. Prandy (1999), “a person gets satisfaction from his surroundings and he analyzes the class identification through group or individual position or social mobility”. A man also gets involved in stock market activities in order to take his social standard at higher place and also to show off his position in a group he socializes. Social interaction can be seen through different dimension, one of which is cognitively. In business sector whenever someone wants to take decision about any investment or buying, it is important for him to know the history or background, full knowledge and understanding of the subject matter so he would decide about it properly, this is called cognitive decision. The understanding and interpretation between parties about/related to their work is also cognitive dimension (Cicourel, 1973).

A person can improve his cognition or knowledge and develop a better understanding of things through three ways. Firstly by a very common and direct way of social interaction, i.e. by exchanging information and sharing knowledge (Nahapiet & Ghoshal, 1998). Second way of developing knowledge is to observe and evaluate the surrounding activities without any interrogation or interaction. A person just interprets knowledge through observing the environment, Berger & Luckman (1996).

The third way, to combine the first and second methods, means by observing the surrounding and simultaneously examining can help develop the knowledge Boland & Tenkasi (1995), two aspects are important to improve knowledge, one is to accept a point of view and the other is to create a point of view.

Hence it is proved through these discussions that for any type of buying/investing decision, one must have full knowledge about it, and the knowledge is developed through a combination of social relation and observation. Grootaert (1997), the work associations, social networks or social engagements effect the community production. Stock market is also a community where selling and buying of stock is continuously carried on therefore it is also affected by the social capital. The performance of social capital, in turn is affected when a company tries to implement non force able functions, which is an important factor (Luarn et al., 2005). There are two dimensions of social capital; horizontal and vertical, that generates personal qualities in a person (Fombrun & Wally, 1989). The more high quality of social capital the more a firm’s overall performance and behaviour is improved, that’s how we know that a firm needs social capital (Danchev A., 2006).

There are many factors that influence social capital like cultural, psychological (moral capital), natural conditions and non-economical conditions etc. examples of non economical forces are “family background, income or expense of the person, educational level, investments or savings, social capital, etc”. Justice, beneficence and temperance; these three things define the level of person’s behaviour (Ratnapala, 2003). Stock activities also involve social capital in them because stock market is a community that has its own cultural, psychological and non economical factors.

It is very difficult to say that all the economical factors may influence the social capital at a time. It’s not necessary that all the psychological, social factors influence a person, even the impact of blood relations is kept out of discussion here. The community or a firm is considered a system and through system analysis it is decided which factors are most influenced (Palanisamy, 2005).

Psychological study states that there are two factors that influence an individual’s intensions or behaviour. Either he reacts upon actions or activities of some other individual or other individual asks him or forces him to do so. The intention or motivation to do something develops in an individual only when either he has full information about it or has some past experiences. Mostly it relates to his past experiences that he thinks may help him in future.

Two types of factors influence the buying decision; a situational factor and a non situational factor. Non situational factor vary from person to person for example personality, mentality, gender and the power of decision, it may also be called internal factor. Situational factors remain same for a group of people. These are the factors that are present in a person’s surroundings physically, socially or culturally. These vary according to time and place and can also be called as external factors (Belk, 1975).

Social interaction like personal relations, friends, family relatives, play an important role in buying decisions (Beardon et al., 1989). Whenever a person takes a decision to buy or invest, it’s his nature to discuss the matter with his close relations, surroundings etc, to take an idea about his decision. That’s why social relationships have great impact on a person’s behavioral finance.

It’s a normal behaviour that an investor plans and decides before investing or stock purchase. But there are some people who go unplanned, making spontaneous decisions and purchases. This type of behaviour is known as impulse buying behaviour. It comes from social surrounding environment and develops due to situational factors but sometimes due to non-situational factors also (Youn & faber, 2000).

Impulse buying behaviour is found in people who are more emotional or of intuitive nature, Youn & faber (2000), it is also found in those who lack experience, understanding and knowledge of buying decision. This behaviour changes normal buying behaviour and creates psychological problems. A person has no control over impulse buying; it is social interaction and changes in his surroundings.

For an investment decision it is very important to deal with emotional and financial aspects simultaneously (Kahneman & Riepe, 1998). Whenever a person makes a decision he has to consider all the internal and external factors. In decision making process, person priorities are very important, whether they are emotional, cognitive process with its limitations, organizational policies or motivational process etc.

Investors have different types of personalities that are tested and judged through different styles. Sometimes they are judged through their lifestyles and sometimes through their investing nature that what types of investments they have been doing and in what type of projects. Wood & Zaichkowsky (2004) the investor of a stock market has four types of behaviour and have different types of qualities; risk taker, risk averse, neutral and long term profit seeker.

The first type, the risk takers are mainly focused on risk meaning they go for high risk and high returns. The second type are the risk averse, who are afraid of risk and cannot bear loss. They mainly invest in projects where there is at least minimum return. The third type is neutral, i.e. they focus on both the risk and the loss. Fourth type is the long term profit seeker means that the project that gives profit on a fixed amount for a long period of time. Mostly old age people are interested in this type.

Aggressive, Moderate and Conservative are the natures of investor based on their lifestyles. The investors are classified through these also every individual has a different lifestyles and decision of his life are very much dependant on it. For example, the people who are very aggressive take rapid decisions and invest immediately. The people of moderate nature work through market analysis and the conservative category I the one that decide over its past experiences; in a sense that they believe the outcome / result to remain the same as before.

Sometimes investors are classified wrongly through their life styles because the emotional and financial backgrounds are ignored; upon which the life styles depend, through this that investors are of different types and nature. Sahi S. K. & Arora A.P. (2012) has categorized investor behavior into three. The first were those who think of investing in every project, most of them are new learned confident, efficient planner, those who forecast very smartly and invest abruptly. The investor’s decision of this category has great impact on financial activities. This means that they do not manage their finance properly and think of investing at many places to get appropriate returns, due to which sometimes they face losses.

The second category, invest through proper analysis of profits / losses, managing and planning their financial flow properly. The satisfaction levels of their financial decision are high and take no chance of error in decision making. The third category is aggressive investor, having risky nature. They move with the concept of high risk high return and goo for higher profits, they are also good predictors (Sahi S. K. & Arora A.P., 2012). According to economical theory, whenever a person is about to take decision, consider all needs, fact & figures, and wants the decision to be long lasting. When a person takes financial decision bases on needs & wants, emotional reaction effects the needs & wants whether negative or positive, so emotional reaction are connected with financial decision that why individuals make decision for longer period, The stock market index instability is linked with various factors such as positive or negative relationship with someone. As far as the market performance is concerned, it is linked with the individual firm or group firm (Rui T. Dias, 2005). The interest increases in relation to purchase the share with the performance of market and valuation of price. An investor has three aspects of nature, dividend yield, capital gain and natural investor. The investor taking dividend yield invests in the stocks of the firm from where he can get the maximum dividend. Capital gain is related to price valuation because people do not take dividend from it but they invest in that firm where the stock prices vary frequently.

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