Investor Education and Trading Activity on The Stock Market
Investors are the pillar of the stock market. Educating them about the technicalities of the securities markets and about how to make an informed decision is a way of protecting and promoting the interests of an investor. Every investor is different as every individual has different tolerance towards risk, time, amount of capital, and preferences. For example, someone may prefer investing in very low-risk schemes like bonds and deposit certificates, which will lead to very small gains while there could be others who would want to take additional risks to make larger returns.
Education is one very important characteristic that explains the choices, performance, and risk-taking ability of an investor on the stock market. An informed/ educated investor:
Understands and manages risk:
An informed investor is able to understand and manage his risk component effectively. Basically, risk management consists of 3 parts, i.e. – Identification of risk, Evaluation of risk, and risk acceptance/ tolerance and mitigation.
Participates in the financial markets more actively and confidently:
An educated investor is able to participate in the financial markets more actively and confidently because he is aware of what and how of the financial markets. Recent data from The Securities and Exchange Board of India (SEBI), indicates that there has been a sudden rise in the first-time Demat users in April 2020-2021, rising to the highest at 10.7million. The remarkable rise in the number of first-time online Demat account users shows that the investor is more aware, capable, and confident of participating in the financial markets actively.
Less vulnerable to fraudulent schemes:
Since the investor is more aware of the plans and policies floating around in the financial markets, he is able to make a conscious decision as to what he/she really expects out of his investments. Therefore, investors’ education reduces investors’ vulnerability to potential frauds.
Plans his financials and retirement thoughtfully:
Technically sound investors will definitely have a more scientific approach towards planning their future and post-retirement plans vis-a-vis an investor who is not so well informed about the same.
Better reach and understanding of the financial products, services and methodology:
It is important to understand various financial products, services and the methodology of dealing in the same. An informed investor is in a better position to understand these things better and apply various permutations and combinations of the options available to him to maximise his financial gains.
Understand their rights as an investor:
Rights and duties go hand in hand and similarly in the financial world too, if the investor is expected to perform several duties, he has certain rights that he/she should be aware of. Investors’ education also provides a better understanding of the rights and duties of being an investor.
Able to experiment:
With knowledge and experience, comes the confidence to experiment. Considering how much risk an individual is willing to take, investors’ education gives him/her more confidence to experiment with the various tools available in the financial world, thereby aiming to fulfill his/her financial goals.
Understands financial markets better:
Investors’ education is an important factor that influences the financial decision-making of an investor. Awareness of financial markets and products may include everything from trading to investing, setting up financial goals, what and how of online trading, how to open Demat account, what is a trading account and why is it important to what are the various options available to an investor/trader to meet his financial objectives, how the stock markets behave, what is the trading pattern in a certain industry or demography, how world economy and politics can influence the stock prices, so on and so forth. An educated investor goes more by his knowledge and experience than by speculation.
Across the globe, investors’ education is considered as the key to protect their rights, build confidence amongst them and help them make much better decisions with regard to their financial planning and decision making. During the year 2008, after the global financial crisis, the need for educating the investor gained importance as the investors were making huge and multiple losses.