This article presents the results of researches concerning individual investors' performance, behaviour and preferences on the stock market. The results show that individual investors' net returns (i.e. after accounting for transaction costs) underperform relevant benchmarks. There is also a relationship: the higher investor's turnover ratio, the lower net return. These results are consistent with the behavioral finance models in which investors overestimate the value of information they possess. Their overconfidence leads to excessive trading which hurts their performance. Thus, the majority of individual investors could improve their performance if they limited the number of transactions. Individual investors hold underdiversified portfolios (compounded on average of 4 stocks). In contrast to institutional investors, they prefer small stocks and stocks which do not pay dividends.
Financed by the National Centre for Research and Development under grant No. SP/I/1/77065/10 by the strategic scientific research and experimental development program:
SYNAT - “Interdisciplinary System for Interactive Scientific and Scientific-Technical Information”.