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2/4/2014

Assignment

Factors that Influence Investors Decision Making in Bangladesh


This assignment aims to understand the factors which effect the investment decision by individual investors in stock exchange of Bangladesh. We have basically categorized the factors into five (05) main parts, Economic Factors, Psychological Factors, Social Factors, Demographic Factors and lastly Uncommon Factors. These factors are explained below:

Figure: Factors That Influence Investors Decision Making in Bangladesh

Economic Factors: Past Performance of the Company: Now a days, educated and knowledgeable investors in Bangladesh check the past performance of the company before investing in a certain security. Before investing on any particular stock, investors go through the past history of the company, their trend of stock price and dividend policy. Required Rate of Return: The most important part for the investors in Bangladesh is the required rate of return from their investment. In Bangladesh, most of the investors are too much reactive about any new information of any particular security. So, if any security is suddenly gives a higher return on investment, investors starts to invest on that security without knowing the details of the company and its shares. Benefits: In Bangladesh, investors seek various types of extra benefits which differs from person to person. Example: Some invests to take the advantage of tax benefits, someone invest for capital growth and someone invest for the protection from inflation and for many other reasons. Duration: Investors invest based on the time duration of the securities. They devote much of their time in analyzing various financial plans and other investment options. If investors want to invest for short-term, they go for short-term securities. Similarly, if investor want to invest in long-term basis, they go for long-term securities and seeks higher return from it.

Psychological Factors: Cognitive Bias: Cognitive bias is the common situation among the investors in Bangladesh (mostly less educated investors) who invests in some selected securities based on their personal admiration and without proper judgment. Example: If an investor admire Beximco Textiles Ltd. as a leading textile company of Bangladesh, he or she will think to invest in Beximco Textiles Ltd. based on the admiration he or she has for it without judging the market of its shares. Get Rich Quick: In Bangladesh, people always have a desire for more money within short period of time. If the stock market is on the favor for the investor, he or she can earn more from there. This earning make investors think that they can get rich quickly by investing more in the stock market, which is not an absolute truth as stock market position is always changing. Investor cannot know whether investing on any stock will be profitable or not if he or she does not study the stock market. Over and Under Confidence: Some of the investors in Bangladesh gets over-confident very quickly if they receive good return once or twice from their investments. As a result, they starts to believe to their abilities heavily and invest in securities without studying the industry and the company, which leads them towards a loss. On the other hand, there are also some investors who are too much defensive on their investment as they want to take less risk and also want avoid bad decisions. For these reason, they take less market opportunities and usually invests in government securities.

Social Factors: Influence of Peoples Opinion: Investors take suggestions from other persons before making any investments. Investors who are intelligent and risk averse wants to take suggestions from peers, financial experts or any share brokers and also use their own knowledge before investing in a particular security. Similarly, there are also some investors who gets too much influenced by other people and as a result, they invest in a security without analyzing the company and security and incur loss. Demographic Factors: Source of Income: As most of the individual investors in Bangladesh has lower income and capital, they mostly prefer securities which will give them a steady and continuous return from their investments. Uncommon Factors: Political Situation: Political instability is one of the most devastating situations for the stock market of Bangladesh as it reduces the volume of transactions in the market. So for individual investors, they do not feel encouraged to invest in the stock market when any sort of political hazards are going on. They only want to invest in any security when the political situation is sound and securities have high liquidity in the market.

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