Academic journal article Baltic Journal of Economics

Investor Education and Trading Activity on the Stock Market

Academic journal article Baltic Journal of Economics

Investor Education and Trading Activity on the Stock Market

Article excerpt

1. Introduction

One might think that investing on the stock market is a difficult task and therefore the individual would assess one's abilities rationally. The empirical evidence suggests the opposite as the investors tend to oversimplify the situations that lead to mistakes in the investment decision process (Shefrin, 2002). Still, making mistakes is not so costly for the investors' wealth. Nicolosi, Peng, and Zhu (2009) posit that investors do learn from mistakes and their trading experience improves performance on the stock market. In order to understand investors' behaviour and financial decisions on the stock market, it is important to determine whether investors' education affects trading activity.

Education is a significant component, which among other factors influences investors' performance, risk-taking and stock market participation. Campbell (2006) notes that educated investors participate more actively on the stock market and they tend to make more rational investment decisions than investors with lower educational level. Besides stock market participation choices, education is considered a key element explaining investors' risk-taking behaviour. Grable (1998) provides empirical evidence that education appears to encourage risk taking and offers a possible explanation that higher level of academic education allows individuals to assess risk and benefits more adequately compared to investors with a lower educational level. Goetzmann and Kumar (2008) find that investors who are younger, have lower income, are less-educated, and less-sophisticated, tend to hold portfolios that are highly volatile and consist of stocks that are more highly correlated compared to stocks, which were chosen randomly. Anderson (2007) adds to this viewpoint by stating that less-educated investors invest a greater proportion of their wealth in individual stocks, hold more highly concentrated portfolios and have worse trading performance.

Several authors state that besides academic education, real-life trading experience helps to achieve better performance on the stock market. Dhar and Zhu (2006) provide empirical evidence that trading experience helps investors to reduce certain behavioural biases and that investors' trading improves over time. Feng and Seasholes (2005) use the number of trades as a proxy for investor experience and find that investors do learn from their trading experience. Education is considered an important characteristic explaining investors' stock market participation choices, performance and risk-taking decisions on the stock market. Assessing the impact of education on investor trading experience in the form of trading activity, would be important in understanding investors' financial decision-making process.

The aim of the paper is to study how educational characteristics influence investors' trading activity and whether investors benefit from their trading experience. This study uses the number of trades as a proxy for investors' trading activity and trading experience. Nguyen and Schuessler (2012) state that a higher level of education reduces behavioural biases such as self-attribution bias, anchoring bias and representativeness and helps to make more rational investment decisions. Hence, this study formulates the hypothesis that investors with good results in national state administrated high school exams and investors with higher level of education trade more on the stock market. The rationale for those investors executing more trades to a certain extent is to gain practical experience and use this experience to achieve higher risk-adjusted returns on the stock market.

Liivamägi, Vaarmets, and Talpsepp (2014) find that the level and type of education affect investment decisions and performance on the stock market. Christiansen, Joensen, and Rangvid (2008) propose that financial decisions are influenced by the type of education and show that individuals who obtained university degree in economics, have higher tendency to hold stocks. …

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