Retail investors Behavior in Stock Market
Introduction
Retail investors, defined as individual participants who buy and sell securities for personal
accounts, have become increasingly active in Nepal’s capital market.
In Nepal, the term "retail investor" is not explicitly defined in a single specific act, but it is
generally understood based on the Securities Act, 2007, and regulations by the Securities Board
of Nepal (SEBON).
Key Features
Individual – Not a company, bank, or institution.
Small-scale investments – Buys/sells securities in limited quantities.
Protected by SEBON – Gets priority in IPOs
No license needed – Can trade directly via a broker/Demat account.
A retail investor, as per SEBI's guidelines, is an individual investor whose investment in
securities does not exceed 2,00,000(Indian currency).
With the expansion of internet access, mobile trading applications, and financial awareness,
more Nepalese citizens are engaging with the Nepal Stock Exchange (NEPSE) than ever before.
According to NEPSE reports, there has been a significant increase in the number of Demat
accounts and daily trading volume, particularly following the COVID-19 pandemic, reflecting a
growing public interest in equity investments. The behaviour of retail investors has long been a
subject of interest and study in the field of finance. Retail investors, comprising individual
investors who participate in financial markets, play a significant role in shaping market dynamics
and asset prices. Understanding how these investors make decisions, react to market conditions,
and engage with financial instruments is crucial for both academics and practitioners.
Understanding the behavior of retail investors is crucial for regulators, policymakers, and market
analysts in Nepal. Retail investors tend to make decisions based not only on financial
fundamentals but also on behavioral factors, including psychological biases, social influences,
and personal risk tolerance. Behavioral finance literature highlights key concepts such as
overconfidence, herd behavior, and loss aversion as major influencers of individual investment
decisions (Barber & Odean, 2000; Kahneman & Tversky, 1979). In emerging markets like
Nepal, where formal financial education is still developing, such biases may be more
pronounced, leading to increased market volatility and speculative trading.
Many factors influence how retail investors decide to buy stocks. These include macroeconomic
factors like inflation, interest rates, and economic growth, as well as market-related factors like
company news and stock price changes. Technical indicators such as RSI, MACD, and Bollinger
Bands also play a role in helping investors time their purchases. On the other hand, non-technical
factors such as expert opinions, advice from friends and family, personal beliefs, and intuition
also impact decision-making.
In Nepal, the stability of the government and policies from institutions like NRB, SEBON, and
the Ministry of Finance can affect investor confidence. Demographic factors like age, gender,
income, and occupation can also shape how investors respond to the market.
This research article will examines the behavioral patterns of retail investors in the
Nepalese stock market using primary data gathered through structured questionnaires. The aim is
to explore the underlying motivations, decision-making processes, and informational sources that
drive retailer investor actions. The insights gained from this research article can have significant
implications for policymakers, financial institutions, and market participants, helping to enhance
market efficiency, stability, and investor protection.
Problem statement
Even though more and more retail investors are taking part in Nepal’s stock market, we still
don’t fully understand how they make their buying decisions. Most past studies focus on one or
two factors, but real-life decisions are influenced by many things at once.
There are four main problems in the current research:
Not enough combined analysis – Most studies look at either economic or technical
factors, but not how they work together.
Little attention to social and personal factors – Things like expert advice, family
opinions, and intuition are often ignored.
Lack of focus on policy and regulation – The effect of government policies and rules
from NRB and SEBON are not well studied.
This study aims to fill these gaps by looking at all these different factors together to better
understand how retail investors in Nepal decide which stocks to buy.
Literature review and hypothesis development
Stock markets don’t just move because of company profits or economic news—they also swing
based on how investors feel. When people get too excited or too fearful, markets can become
unstable. Investor emotions play a significant role in driving stock market movements. Several
studies have shown that when investors become emotional—either overly optimistic or
pessimistic—markets tend to become more volatile and unpredictable. Researchers have studied
this worldwide, and here’s what they found in simple terms:
Macroeconomic factors
Retail investors are individuals who buy and sell stocks on their own, usually with smaller
amounts of money and less access to expert advice or advanced market tools (Barber & Odean,
2000). Their decisions are shaped by both economic news and personal feelings or biases (Rooij
et al., 2007).
Macro economic factors and their relevance
Inflation
When prices go up (inflation), the value of money falls. This reduces the real profit investors
make from stocks. As a result, retail investors often avoid buying shares during high inflation.
Chatrath, Miao, and Ramchander (1997) found that when people expect prices to rise, stock
prices usually fall, which discourages buying.
Interest Rates
When interest rates go up, it becomes more expensive to borrow money. Also, saving in banks
becomes more attractive. Retail investors often move their money from stocks to safer options
like fixed deposits or bonds during these times (Rigobon & Sack, 2004).
GDP Growth
When the country’s economy is growing well (high GDP), businesses earn more and people feel
more confident. This encourages retail investors to invest more in the stock market. Bekaert and
colleagues (2011) found a strong link between economic growth and increased buying by retail
investors.
Behavioral Views
Retail investors don’t always act logically. Because they have less information and market
knowledge, they often react emotionally to big economic news. According to De Bondt and
Thaler (1985), they may overreact to bad news or copy others (herd behavior).
In Nepal, Acharya (2021) found that NEPSE investors often act impulsively when there are
changes in inflation or interest rates. Instead of analyzing the market themselves, they tend to
follow what big investors are doing.
Studies Say About Emerging and Frontier Markets
In India, Bhattacharya et al. (2011) found that retail investors traded less during high inflation
periods.
In Bangladesh, Alam and Uddin (2009) found that higher interest rates led to lower stock prices
and reduced retail buying.
In Nepal, researchers like Pradhan (2015) and Shrestha (2018) showed that inflation, interest
rates, and other economic factors have a big impact on how retail investors behave.
Here is hypothesis development
H1: Macroeconomic factors significantly influence retailer buying decisions in the stock market.
Sub-Hypotheses:
H1a: Higher inflation negatively affects retail investor buying behaviour.
H1b: Rising interest rates reduce stock market participation by retail investors.
H1c: Positive GDP growth encourages increased retail stock purchases.
Microeconomic factors
Stock Price Volatility and Timing Decisions
Retail investors are sensitive to price changes and often attempt to time the market. High
volatility either attracts risk-seeking investors or deters risk-averse ones. Barber and Odean
(2008) observed that retail investors often buy "attention-grabbing" stocks with recent price
spikes, even when those decisions are not backed by fundamentals.
Firm Financial Performance
Micro-level indicators such as earnings per share (EPS), dividend payout, and return on equity
(ROE) are key drivers of investor behavior. Dhungana and Bhattarai (2018) found that in the
Nepalese capital market, dividend announcements significantly influence retail stock purchases.
Corporate Events and Announcements
Retail investors react strongly to corporate news such as mergers, bonus shares, or stock splits.
Baker and Wurgler (2007) argued that investor sentiment toward firm-specific news has a
measurable impact on stock price and trading activity.
In Nepal, Ghimire and Bista (2019) noted that announcements of governance changes or capital
restructuring often led to increased trading by retail investors.
Hypothesis development
H1: Microeconomic factors significantly influence the buying decisions of retail investors in the stock
market.
Sub-Hypotheses:
H1a: Stock price volatility influences the timing of retail investor purchases.
H1b: Company-specific financial performance (e.g., earnings, dividends) positively
affects retailer stock buying decisions.
H1c: Retail investors respond positively to favorable news or announcements by specific
firms (e.g., stock splits, mergers, or bonus issues).
Technical analysi
Use of Price Trends and Moving Averages
Retail investors frequently use historical price movements and trend lines as decision tools.
According to Jegadeesh and Titman (1993), short-term momentum strategies—based on past
price trends—often guide individual investor purchases.
Patel et al. (1999) found that technical indicators like 50-day and 200-day moving averages are
widely followed by Indian retail traders when deciding to buy or sell.
Volume as a Confidence Signal
Trading volume is a key technical signal. High volume often suggests strong investor interest,
which retail traders interpret as confirmation of a trend.
Lee and Swaminathan (2000) showed that volume-supported trends tend to be more reliable and
attractive to retail investors. In Nepal, Acharya (2021) reported that many NEPSE retail traders
look for spikes in volume before buying a stock.
Chart Patterns and Visual Cues
Technical patterns like “double bottom,” “cup and handle,” or “breakout zones” are common
tools for retail investors. These patterns are easier for non-institutional investors to understand
and use compared to complex financial models.
Lo, Mamaysky, and Wang (2000) demonstrated that technical chart patterns have predictive
power and are frequently used by individual investors.
Momentum Indicators like RSI and MACD
Retail investors often use RSI to judge whether a stock is overbought or oversold, and MACD to
identify momentum shifts.
Hudson, Dempsey, and Keasey (1996) found that traders, especially in emerging markets, rely
heavily on momentum indicators for short-term buying decisions.
Hypothesis development
H1: Retail investors’ stock buying decisions are significantly influenced by technical
analysis indicators.
Sub-Hypotheses:
H1a: Retail investors rely on price trends and moving averages to make buying decisions.
H1b: Volume indicators positively influence retail investor confidence in buying a stock.
H1c: Technical chart patterns (e.g., head and shoulders, double bottom) trigger stock purchases
among retail traders.
H1d: Technical signals such as Relative Strength Index (RSI) and MACD (Moving Average
Convergence Divergence) influence the timing of retail stock purchases.
Expert opinion
Influence of Analyst Recommendations
Retail investors often rely on expert recommendations due to lack of in-depth financial
knowledge.
Womack (1996) found that analyst buy recommendations significantly impact stock prices in the
short run due to increased retail participation.
Bradshaw (2004) showed that individual investors are more likely than institutions to react to
analyst forecasts because they see them as credible guidance.
Financial Media and Market Experts
Television channels (e.g., CNBC, Bloomberg) and expert interviews affect investor sentiment
and decision-making.
Engelberg, Sasseville, and Williams (2012) studied "Mad Money with Jim Cramer" and found
that stocks recommended on the show experienced immediate price surges due to retail investor
activity.
In Nepal, Acharya (2021) noted that NEPSE investors often act on tips heard on business
programs or expert commentary from local financial journalists.
Brokerage Firm Ratings and Advisory Services
Retail investors frequently follow recommendations issued by their brokers.
Ivković and Weisbenner (2005) found that retail trades were heavily clustered around firms
covered by analysts from the same brokerage or advisory platform used by the investor.
In the Nepalese context, firms like MeroStock or NEPSE Alpha often issue weekly reports or
ratings, which influence retailer sentiment and action.
Social Media and Influencer Experts
Platforms like YouTube, X (Twitter), and Telegram have allowed "financial influencers" to build
large retail audiences.
Chen, De, and Hu (2014) showed that retail investors on platforms like StockTwits tend to
follow investment ideas and act on expert-like user content, even when unverified.
In Nepal, popular Facebook pages or YouTube channels featuring NEPSE commentary (e.g., by
former bankers or traders) heavily influence what retail investors choose to buy.
Hypotheis development
H1: Retail investors’ stock buying decisions are significantly influenced by expert opinions
and recommendations.
Sub-Hypotheses:
H1a: Retail investors tend to buy stocks based on recommendations from market analysts and
financial advisors.
H1b: Media commentary and expert interviews influence retail investors’ perception of market
trends.
H1c: Buy/sell ratings from brokerage firms or TV analysts affect the timing and confidence of
retail buying decisions.
H1d: Social media posts and YouTube channels by perceived “experts” shape retail stock
selection, especially among younger investors.
Families and friend
Retail investors often place greater trust in personal relationships than in unfamiliar or technical
sources.
Hong, Kubik, and Stein (2005) found that people are more likely to invest if they live in
communities with active social networks of investors, showing the strong role of local peer
influence.
In India, Kale and Mekoth (2018) found that small investors preferred suggestions from relatives
and co-workers over analyst reports.
In Bangladesh, Alam et al. (2016) observed that first-time retail investors heavily relied on
family recommendations due to fear of making mistakes.
In Nepal, word-of-mouth remains a key driver, with retail investors forming informal Telegram
or Facebook groups to share buying ideas, often based on non-professional advice.
H1: Retail investors’ stock buying decisions are significantly influenced by the opinions and
suggestions of family and friends.
Sub-Hypotheses:
H1a: In the absence of professional advice, retail investors depend on peer networks for
investment decisions.
H1b: First-time or inexperienced investors tend to follow family and friend
recommendations due to trust and shared risk perceptions.
Intuition
Intuition in Investment Decisions
Intuition refers to fast, unconscious decision-making based on experience, feelings, or internal
judgments.
According to Kahneman (2011), intuitive thinking (System 1) dominates rational analysis
(System 2) when decisions are made under time pressure or limited information—common for
retail investors.
Gigerenzer (2007) argued that in environments with uncertainty and incomplete information
(like the stock market), intuitive heuristics are not only common but sometimes effective.
Retail Investor Behavior and Emotional Bias
Retail investors often make decisions emotionally or impulsively.
De Bondt & Thaler (1995) found that emotions like overconfidence and regret avoidance lead
investors to follow their intuition rather than data.
In the NEPSE context, Acharya (2021) found that many individual investors act on “instinct” or
“inner feelings” when they think a stock is likely to rise, even without clear indicators.
Lack of Financial Literacy and Use of Intuition
When retail investors lack technical or fundamental skills, they compensate by using feelings,
past experiences, or market rumors.
Rooij, Lusardi, & Alessie (2011) showed that investors with low financial knowledge are more
likely to make intuitive and less rational financial choices.
In emerging markets like Nepal, the absence of formal education in financial analysis drives
many to rely on market "gut feelings" or hunches, according to Shrestha (2018).
Reinforcement from Past Intuitive Success
When investors succeed once using intuition, they tend to repeat the approach.
Barberis and Thaler (2003) note that this behavioral reinforcement leads to more instinct-driven
trades, even if outcomes are based on luck.
In Nepal, informal interviews and surveys by local brokers (e.g., NEPSE Circle, 2023) indicate
that many retail investors believe intuition and experience are more useful than charts or ratios.
H1: Retail investors’ stock buying decisions are significantly influenced by their personal
intuition rather than formal analysis.
Sub-Hypotheses:
H1a: Retail investors rely on gut feelings when deciding to buy stocks, especially under
uncertainty.
H1b: In the absence of technical or fundamental knowledge, intuition acts as a substitute for
formal decision-making.
H1c: Prior successful experiences with intuitive decisions reinforce future intuitive-based buying
behavior.
H1d: Emotional states (fear, excitement, overconfidence) shape intuitive judgments in stock
selection.
Government stability
According to Bekaert et al. (2014), political and government stability reduces uncertainty, which
encourages investor confidence and increases stock market participation, especially among retail
investors who are risk-averse.
Arouri & Rault (2012) found a positive link between political stability and stock market
performance in emerging economies.
Retail investors are generally more sensitive to macroeconomic and political signals than
institutional investors (Barber & Odean, 2008).
Chan & Fong (2004) highlight that retail investors reduce trading activity when there is
instability or unpredictability in governance due to fear of volatility.
Behavioral finance suggests retail investors are loss-averse and more likely to avoid trading
when government stability is low (Kahneman & Tversky, 1979).
Hussain et al. (2017) found that retail investor sentiment is strongly influenced by news and
political climate, affecting their trading decisions.
In the context of countries like Nepal, India, or Pakistan, studies (e.g., Shrestha & Manandhar,
2021 in NEPSE) show that political events (like elections, strikes, or cabinet changes) lead to
short-term drops in retail trading volumes.
Hypothesis development
H1: Higher government stability positively influences retailer participation and trading activity in the
stock market.
Policy : NRB,Minister of finance and sebon
NRB Policy and Retail Investors
Monetary policy influences liquidity and interest rates, which in turn affect investment in stocks.
When NRB reduces interest rates or increases money supply, retail investors often shift from
savings to stocks (Mishra & Pradhan, 2016).
Adhikari (2022) showed that policy rates by NRB have a direct impact on NEPSE trading
volumes, especially among individual investors seeking higher returns.
SEBON Regulatory Framework
A transparent, stable, and efficient regulatory environment increases investor trust and reduces
perceived risk (La Porta et al., 1997).
K.C. & Neupane (2020) found that SEBON's improved disclosure requirements and surveillance
mechanisms encouraged more retail participation in Nepal’s capital market.
Ministry of Finance – Fiscal Policy
Taxation and fiscal policy (like capital gains tax and transaction fees) have been shown to
significantly influence investor behavior (Bird & Zolt, 2005).
Ghimire & Bista (2019) observed that favorable budget policies, especially reduction in capital
gains tax, directly correlated with a rise in retail trading volumes in NEPSE.
Empirical Insights from Developing Markets
In India, Bansal & Pasricha (2018) concluded that retail investors are highly responsive to fiscal
announcements and central bank interventions.
Hypothsis development
H1: There is significance relation the policy taken from government and retailer stock trading
activities
Or
H1: Expansionary monetary policy from NRB positively influences retail investor trading
activity in the stock market.
H2: Clear and transparent regulatory frameworks by SEBON increase retail investor
participation.
H3: Investor-friendly fiscal policies and capital gains tax reforms by the Ministry of Finance
increase retail trading volume.
