Academic journal article The International Journal of Business and Finance Research

Does Online Trading Affect Investors' Trading Intention?

Academic journal article The International Journal of Business and Finance Research

Does Online Trading Affect Investors' Trading Intention?

Article excerpt

ABSTRACT

The purpose of this study is to investigate the relationships and effects of online trading, the illusion of knowledge and control, information processing cost, trading intention, and expected performance. The research findings' show that online trading itself will increase investors' trading intentions, information processing cost, and illusion of knowledge and control. Also, the information processing cost and the illusion of knowledge and control will further raise investors' expectations about future performance directly and indirectly via trading intention, meaning that online trading tends to make investors become overconfident about their future expected performance.

JEL: D83, G02, G11

KEYWORDS: Online Trading, Illusion of Knowledge, Illusion of Control, Information Processing Cost

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Online trading has become a major trend in stock markets around the world because of its lower commission cost for trading, faster trade execution, more control and flexibility over the types of transaction investors choose to conduct, and no time or geographical limitations. In other words, online stock trading has created an urge to trade and a desire to have more control over what investors are investing in (Hurley, 2000).

Investors can easily find a huge amount of information through the Internet, whereas more information often increases confidence in judgments (Oskamp, 1965; Gill, Swann, and Silvera, 1998; Hall, Ariss and Todorov, 2007) and causes investors to have the illusion of knowledge. Online investors have to collect and analyze their own information and place orders through the Internet by themselves. Such an active involvement makes investors feel the probability of favorable outcomes has increased, thus creating the illusion of control. Besides, online investors have to spend much time (information processing cost) to analyze the information they acquired from the Internet to turn that information into useful knowledge.

Online trading's low cost, improved execution speed, and greater ease of access may increase investors' trading intention. The illusion of knowledge and control and information processing cost may further increase investors' intention to trade and causes them to trade too actively, which not only leads to higher transaction costs, but possibly lower returns as well. According to statistics from the Taiwan Stock Exchange (TSE), individual investors account for about 60% of stock trading value in 2013. Individual investors are often not as professional as institutional investors, and so they may be more easily influenced by the information processing cost and the illusion of knowledge and control.

Most previous studies on online trading have focused on investors' actual performance persistence by taking secondary data from the financial market. For example, Barber and Odean (2002) analyzed investors who switched from phone-based to online trading during the 1990s, finding that those investors who switched to an online trading performed well before going online, but after online trading they traded more actively, more speculatively, and less profitably. Little or no research has investigated online investors' trading intentions directly through questionnaires. Therefore, our study tries to fill this gap by using a questionnaire format to investigate the relationships between online trading, illusion of knowledge and control, information processing cost, trading intention, and expected performance.

There are five main sections in this study. Section 2 provides some literature reviews about online trading, illusion of knowledge and illusion of control, information processing cost, trading intention, and expected performance. Section 3 outlines the design of the questionnaire and the data we employ. Section 4 presents the empirical results, and section 5 concludes the paper.

LITERATURE REVIEW

The advancement in Internet technology has helped facilitate the growth in online trading. …

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