Factors Influencing Stock Selection Decision the Case of Retail Investors in Colombo Stock Exchange

Abstract

The study examines the equity investment decision process of retail investors in Sri Lanka. Opinions are solicited using a five-point Likert scale survey questionnaire. The analysis of 168 responses indicates that the firm’s perceived value is the most influencing factor in equity selection. The study identifies Accounting Information, Advocates’ Recommendations and Self-Image/Firm-Image to be significant homogeneous groups of the factors influencing stock selection. The risk and historical prices are the second order factors in the process. Decision is also influenced by investors’ expectations on political stability, economic condition and good governance. Goodwill of the firm, stock’s liquidity, dividend payout and publicly available news are marginal factors. The religious beliefs, the family background and advocates’ opinion do not influence while the content of the annual financial statements is less confident. Investors do not aim abnormal returns. The main influencing factors do not show gender, age and education differences. The paper provides insights in to behavioral explanations to many market anomalies; that the investor sentiment is of immense importance.