Impact of Investor Sentiment on Investment Decision and Stock Market Volatility

Abstract

Recent years have witnessed several changes in the Indian economic market mainly in the investment-oriented economy. The main components of economic growth are savings and investments. The impact of these economic changes in the Indian market has enhanced the involvement of investors in the stock market and other investment plans such as pension schemes, mutual funds and other deposits. Behavioral finance is a contemporary research stream that studies human fallibility in competitive markets. It explains stock pricing patterns that are not in line with classical finance theory and aims to integrate insights from psychology. It provides evidence that individuals tend to observe other informed traders before making investment decisions. The purpose of the study is to describe the factors which influence investor sentiment leads to investment decision-making of individual investors. The major factors that affect investment decision-making considered in this study are herding behavior, market factors and awareness factors on investor sentiment in the Indian stock market. The study used both descriptive and exploratory approaches to provide a comprehensive analysis of the research study. Data was primarily collected through a survey in the form of a selfadministered questionnaire from individual investors. Secondary data was collected from the RBI website, NSE and SEBI website. The validity of the questionnaires was tested with the help of experts and a pilot study conducted on a small group of respondents. Data was collected from individual investors who invested in the stock market. The sample was chosen from major metro cities on probability and non-probability sampling. Data is analyzed using Pearson’s correlation, Partial least square method, principal component analysis and GARCH model using SPSS, PLS and Eviews. The results of the study indicate that herding behavior, market factors and awareness factors (media, internet, social interaction and advocate recommendation) on investor sentiment influence investment decision-making. Based on the findings of the study, it can be concluded that the decision-making of investors is highly influenced by investor sentiment. The result shows that investor sentiment has a significant influence on the investment decision-making of individuals. Insights from the study suggest that investors should consider the psychological and emotional factors while making an investment decision.iv It also helps individual investors to avoid the problems faced while making an investment decision. The study could help investors to select a suitable investment aid and avoid repeating expensive errors, which arise due to investors’ sentiment. It is recommended to increase the awareness regarding investors’ sentiment among individuals, to increase their understanding of the financial settings and to make them confident while investing. Knowledge of behavioral finance would enhance the decision-making capabilities of individual investors in the stock market. Thus, the study calls for the need to increase awareness among Indian investors about behavioral finance and its usefulness in investment decision-making. This study also sheds light upon the behavior of Indian individual investors so that policymakers can take appropriate measures to provide the appropriate guidance. Policymakers can conduct awareness campaigns to increase investors’ knowledge of the market conditions and to enhance proper investment decision-making among them. It confirms that the investor relies on their sentiment while making investment decisions. Hence, the stakeholders in the stock market should focus on investor sentiment and other psychological aspects of individual investors as well.