Stock Selection Behaviour of Retail Investors: A Literature Review

Abstract

Purpose: This study aims to examine the existing literature on the stock selection decisions of retail investors, with a particular focus on the Indian stock market. It seeks to understand the role of behavioural factors such as herding behaviour, anchoring bias, and loss aversion in shaping investment decisions. The research also explores the emerging influence of social media as a significant determinant in the decision-making processes of retail investors. Understanding these behavioural patterns is crucial for stakeholders including shareholders, market analysts, and regulators.

Methodology: The study adopts a literature review approach, analysing existing academic and industry research related to retail investors’ stock selection behaviour. Emphasis is placed on behavioural finance theories and empirical studies that investigate the psychological and social influences affecting retail investment decisions in the Indian stock market context.

Findings: The study finds that behavioural variables—particularly herding behaviour, anchoring bias, and loss aversion—play a primary role in influencing retail investors’ investment choices. Additionally, social media has emerged as a recent but significant factor impacting investor sentiment and decision-making. The research underscores the importance of understanding these behavioural influences for formulating better regulatory frameworks. Insights from this study can help policymakers design market structures that foster rational investment behaviour and contribute to a stable, fair, and transparent market environment for retail investors.

Paper Type: Review of Literature