The behaviour of small investors in the derivatives market of the Johannesburg Stock Exchange

Abstract

The investment approach of individual investors varies from that of institutional investors, and each investor's strategies differ from one another. Investors must select the right investment path based on their unique requirements, risk tolerance, and expected returns, which adds complexity and criticality to the decision-making process. Therefore, this study investigates and identifies the key factors that influence the behaviour of small investors (individual/retail investors) in the Johannesburg Stock Exchange (JSE) derivatives market and ascertains the key factors that influence individual investor’s decision-making in derivative markets in South Africa. The study used finance theories, such as, traditional finance theory and efficient market hypothesis theory with a focus on behavioural finance theory to explain investors’ decision making from a psychological point of view. In the past, there was a prevailing belief that investors made rational decisions when it came to their investments, while efficient Market Theory proposed that markets efficiently incorporate price-related information. Whereas behavioural finance studies have consistently shown that investors are susceptible to psychological factors that can compromise the rationality of their financial decisions. This study examined the psychological factors that influence individual investors’ behaviour in derivative markets that are traded under the umbrella of the Johannesburg stock exchange. The survey's sample size and data collection units were determined through questionnaires and interviews conducted with both investors and brokers. Five hundred questionnaires were sent to the participants and 414 responses were retrieved. 25 interview questions were sent out to the investors and brokers and 16 response was received back from the market investors and brokers. The research utilized a mixed-methods approach, integrating both quantitative and qualitative techniques for data analysis. The findings reveal that investors’ behaviour is been influenced by various psychological factors in the financial market. Factor analysis was utilized to identify and categorize the factors while also assessing validity. Additionally, Cronbach's Alpha was employed to evaluate the survey instrument's reliability. Thus, the findings from this study are that psychological factors, Accounting Information, Personal Attitude and Risk perception are the significant factors that influence investors’ investment behaviour while demographic factors and financial literacy have no influence on investors’ behaviour. Hence, investors should exercise caution and careful consideration when engaging in derivative market investments. Furthermore, market authorities and governmental bodies should take steps to provide assistance to investors both during the decision-making process and afterward.