Attitudes and Trading Behavior of Stock Market Investors: a Segmentation Approach

Ryan Wood, Bayer Health Care
Judith Lynne Zaichkowsky, Simon Fraser University
ABSTRACT - Individual investors now own more than half the stocks on the increasingly volatile US stock market (Editorial Staff A, 2000). Their actions are often unpredictable and often contribute to market volatility (Gibbs, 2000). Stock market crashes, caused by retail investor panic, reduce companies’ ability to raise capital and reduce the portfolios that both investors and financial advisors rely on (Anonymous B, 2000). Unfortunately, it is difficult for companies and advisors to encourage stable long term investing, because little is known about these individual investors; most research is macro or experimental.
[ to cite ]:
Ryan Wood and Judith Lynne Zaichkowsky (2005) ,"Attitudes and Trading Behavior of Stock Market Investors: a Segmentation Approach", in NA - Advances in Consumer Research Volume 32, eds. Geeta Menon and Akshay R. Rao, Duluth, MN : Association for Consumer Research, Pages: 330-330.

Advances in Consumer Research Volume 32, 2005     Page 330

ATTITUDES AND TRADING BEHAVIOR OF STOCK MARKET INVESTORS: A SEGMENTATION APPROACH

Ryan Wood, Bayer Health Care

Judith Lynne Zaichkowsky, Simon Fraser University

ABSTRACT -

Individual investors now own more than half the stocks on the increasingly volatile US stock market (Editorial Staff A, 2000). Their actions are often unpredictable and often contribute to market volatility (Gibbs, 2000). Stock market crashes, caused by retail investor panic, reduce companies’ ability to raise capital and reduce the portfolios that both investors and financial advisors rely on (Anonymous B, 2000). Unfortunately, it is difficult for companies and advisors to encourage stable long term investing, because little is known about these individual investors; most research is macro or experimental.

To try to solve this problem, this study identifies and characterizes segments of individual investors based upon their shared investing attitudes and behaviours. Profiling information on these segments will help companies and financial advisors to selectively communicate to these investors to encourage successful investment growth.

A literature review of the behavioural finance area revealed five main constructs that drive investor behaviour: Investment horizon, Confidence, Control, Risk attitude, and Personalization of loss. Ninety individual investors were surveyed via a questionnaire on these constructs. A cluster segmentation analysis identified four main segments of individual investors: 1) Risk intolerant; 2) Confident traders; 3) Loss averse young traders; and 4) Conservative long term investors.

1) The Risk intolerant group have medium levels of confidence and control. They are not active traders, but do check their investments frequently and seek advice from financial advisors. Financial advice should be centered upon diversification and risk management.

2) The Confident traders have the highest levels of confidence and control, and are the most active traders. These experienced investors are older and have the largest portfolios. This group invests heavily in technology and smaller growth stocks, but also maintains a diversified portfolio. Communications should concentrate on performance related issues. Current news is found more useful than financial data for volatile stocks.

3) The Loss averse young trader group doesn=t mind taking risks but can’t afford to lose money. They frequently use the internet to trade and research their volatile investments, but they rely on financial advisors for advice on stable investments. Advisors should focus communications on diversification and loss management. Companies could target this segment with web pages that offer news updates, which the group finds useful for evaluating volatile investments.

4) The Conservative long term traders have low ratings for control and confidence and, therefore, invest primarily in mutual funds through financial advisors. This groups trades less actively and checks their investments infrequently. This group does not find financial information useful, so results should be summarized. Conservatives may work with financial advisors to encourage long term stock investing within RRSP shelters.

REFERENCE

Journal of Behavioral Finance (2004) Vol. 5, No.3, 170-179.

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