Solutions to manage risks of individual investors in vietnamese stock market,graduation thesis

INTRODUCTION

Rationale of the study

The Vietnamese stock market officially commenced operations in 2000 with the launch of the Ho Chi Minh Stock Exchange on July 20, followed by the Hanoi Stock Exchange on March 8, 2005 Since then, the market has experienced significant growth and development.

The Vietnamese stock market is predominantly composed of individual investors who aim to invest their savings for dividends and interest Their primary objective is to maximize profits from their investments Although some investors have achieved success, many others have encountered unforeseen risks that led to failures.

Recognizing the limitations faced by individual investors, I have chosen to focus my graduation thesis on "Solutions to Manage Risks of Individual Investors in the Vietnamese Stock Market." Through extensive research on individual investors' performance, I propose several strategies aimed at risk management, which are essential for fostering the healthy development of Vietnam's stock market—a crucial avenue for capital raising in the economy I hope my insights will serve as valuable considerations for effectively managing risks among individual investors.

Aim of the study

This study aims to analyze the characteristics of individual investors in the Vietnamese stock market, identify the associated risks, and propose effective risk management solutions tailored for these investors.

VU THUY DUONG – ATCAK13 Page 2

Scope of the study

I have delivered 150 questionnaires to individual investors in Hanoi Stock Exchange.

Methodology of the study

The study's information is derived from two primary sources: a survey conducted among individual investors at the Hanoi Stock Exchange and reliable secondary data from articles, websites, relevant studies, and library textbooks Following the collection of these materials, the author employed research methods including synthesis and comprehensive analysis to evaluate, summarize, and propose solutions and conclusions regarding the topic.

Organization of the study

The main content of the study includes four chapters:

Chapter 1 introduces the study in general

Chapter 2 reviews previous studies on individual investors

Chapter 3 reviews the theoretical issues

Chapter 4 zooms in the situation of individual investors in Vietnamese stock market Chapter 5 recommends some solutions to manage risks of individual investors in Vietnamese stock market

LITERATURE REVIEW

The Behavior of Individual Investor

In September 2011, researchers Brad Barber Davis and Terrance Odean from the University of California conducted a study titled “The Behavior of Individual Investor.” Drawing on findings from numerous studies over the past thirty years, they explored four key aspects of individual investors trading stocks: performance, the disposition effect, buying behavior, and more.

Individual investors often struggle to achieve strong performance due to behavioral biases, notably the disposition effect, where they tend to sell winning stocks while holding onto losing ones, particularly among those with less financial knowledge Additionally, limitations in attention can lead these investors to overreact to news about certain stocks while underreacting to others that are not in the spotlight Furthermore, many individual investors fail to diversify their portfolios adequately, often concentrating their investments in their employer's stock, local companies, familiar brands, and domestic markets.

In summary, individual investors tend to under-diversify and overtrade, thereby incurring relatively high volatility, trading frictions and taxes and thus realizing relatively poor performance.

Portfolio management behavior of individual investors: How they manage their portfolios? Do their behavioral traits and biases cast an impact?

Hayat, M Awan, Khuram Shahzad Bukhari, and Bushra Ghufran - Institute of Management Sciences, Bahauddin Zakariya University, Multan conducted a research

VU THUY DUONG – ATCAK13 Page 4 entitled “ Portfolio management behavior of individual investors: How they manage their portfolios? Do their behavioral traits and biases cast an impact? ”

This research investigates the portfolio management behavior of individual investors by identifying key determinants and assessing their relative significance Data was gathered through direct responses from 28 brokers and 246 individual investors.

Research indicates that investors often exhibit a tendency to quickly sell winning stocks while holding onto losing ones, leading to inefficient portfolio management They are inclined to invest in recently performing stocks and prefer local investments, resulting in under-diversified portfolios Moreover, many investors struggle to set appropriate decline limits for stock prices, causing them to miss opportunities to realize losses This behavior is influenced by their level of involvement and risk preferences, ultimately affecting their overall investment strategies.

Behavioral Portfolio Analysis of Individual Investors

Arvid O I Hoffmann from Maastricht University and Netspar, Hersh Shefrin from Santa Clara University, and Joost M E Pennings from Maastricht University, Wageningen University, and the University of Illinois at Urbana-Champaign conducted research titled “Behavioral Portfolio Analysis of Individual Investors.” This study explores the behavioral patterns and decision-making processes of individual investors in portfolio management.

The analysis utilizes transaction records and questionnaire data from clients of the largest online broker in the Netherlands, excluding accounts held by minors (under 18 years) due to trading restrictions.

In March 2006, there were 65,325 individual trading accounts with a total of over 9 million trades recorded since January 2000, all of which had initial values below €250 and were managed by professional traders to ensure active engagement.

Investors motivated by speculative objectives tend to have greater aspirations and turnover, embrace higher risks, and perceive themselves as more advanced, yet they often underperform compared to those focused on building a financial buffer or saving for retirement Additionally, investors utilizing fundamental analysis exhibit higher aspirations and turnover, take on more risks, display increased overconfidence, and achieve better performance than those who rely on technical analysis.

In conclusion, the purposes of investment of individual investors (speculation, capital growth, secure life …) contribute to determine their return and risk objectives

Individual investors typically underperform relative to institutional investors due to their tendency to exhibit the disposition effect and their failure to diversify portfolios Consequently, they encounter various risks in the stock market This underscores the necessity for effective strategies to assist individual investors in managing risks and enhancing their market performance.

BACKGROUND THEORY OF RISKS OF INDIVIDUAL INVESTORS

Definition of individual investors

An investor is an individual or entity that allocates capital into various asset categories, such as equity, debt securities, real estate, currency, commodities, and derivatives, with the goal of generating profit In the stock market, there are two primary types of investors: individual investors and institutional investors.

Individual investor is a person that buys or sells securities for his/her own account The individual investor is also called a retail investor or retail shareholder.

Characteristics of individual investors

An Investment Policy Statement (IPS) outlines an investor's financial goals, the level of risk they are prepared to accept, and any pertinent investment limitations that the advisor should take into account.

Establishing portfolio objectives for return and risk is a systematic process applicable for institutional as well as individual investor portfolios

The process of identifying an investor’s required returns as well as his or her risk tolerance should take place at the same time

An investor's return objectives can sometimes clash with their risk tolerance When achieving these return goals jeopardizes their comfort with risk, it may be necessary for the investor to adjust their lower and intermediate-priority goals or to accept a marginally higher level of risk.

When an investment portfolio is projected to yield returns beyond the investor's objectives, the investor faces a critical decision: either to safeguard the excess by taking on less risk than they are capable of or willing to accept, or to leverage this surplus to embrace greater risk in pursuit of even higher returns than initially targeted.

An individual’s risk objective, or overall risk tolerance, is a function of both ability to take risk and willingness to take risk

An investor's risk-taking capacity is influenced by their financial goals, available resources, and the time frame for achieving these goals When financial objectives are moderate compared to the investment portfolio, investors can better withstand market volatility and short-term losses As the portfolio expands or the investment horizon extends, the potential for recovering from temporary deficits also rises Longer-term goals provide investors with the chance to explore more volatile investments, which typically offer higher expected returns.

Critical goals minimize error margins and limit a portfolio's capacity to support volatile investments For most investors, ensuring financial security and sustaining their current lifestyle are top priorities, while luxury expenditures rank as the least critical concern.

In contrast to ability to take risk, no absolute measure of willingness exists, nor does any assurance that willingness will remain unchanged through time

The IPS should identify all economic and operational constraints on the investment portfolio Portfolio constraints generally fall into one of five categories:

Liquidity is the capacity of an investment portfolio to effectively fulfill an investor's cash distribution needs, which in turn influences their risk tolerance Various factors can create liquidity requirements that impact an investor's financial strategy.

Ongoing living expenses necessitate a consistent cash flow, making liquidity a top priority in an investment portfolio To effectively manage these predictable costs, maintaining a significant portion of liquid assets is essential for financial stability.

Establishing an emergency reserve is crucial for safeguarding against unforeseen events like sudden unemployment or uninsured losses The size of this reserve should be tailored to individual needs, typically ranging from three months to over a year’s worth of anticipated expenses Those in litigious fields may need to maintain a larger reserve While the timing of emergencies is unpredictable, the immediate need for cash during such situations is vital.

Negative liquidity events, such as significant future cash flows or increased ongoing expenses like anticipated home repairs, can impact financial planning Additionally, changes in cash requirements due to retirement further complicate liquidity needs As the timeline for a major liquidity event shortens, the necessity for portfolio liquidity becomes increasingly critical.

The investment time horizon has already been seen to play an important role in setting return objectives and defining liquidity constraints

"Stage-of-life classifications typically suggest that as investors progress through different life stages, their investment time horizon gradually decreases While this assumption is frequently accurate, it does not hold true in every case."

The issue of taxes is perhaps the most complex investment constraint to be found in private portfolio management The following general categories are widely recognized:

Income tax is assessed as a percentage of an individual's total income, with rates differing based on income levels Common sources of taxable income include wages, rental income, dividends, and interest earnings.

Capital gains tax is applied to the profits an investor earns when selling a capital asset for more than its purchase price Common sources of capital gains include the sale of stocks, bonds, precious metals, and real estate.

Wealth transfer tax: A wealth transfer is assessed as assets are transferred, without sale, from one owner to another

Taxes impact portfolio performance by diminishing growth in two key ways: first, when taxes are paid at the end of a measurement period, they directly reduce the overall portfolio growth; second, when taxes are assessed periodically during the measurement period, they further hinder growth by continuously decreasing the returns.

In individual portfolio management, legal and regulatory constraints primarily pertain to taxation and the transfer of personal property ownership To meet investment goals while adhering to these legal limitations, investors often need to seek guidance from local experts.

Not surprisingly, individual investors often have a wide range of unique circumstances that act to constrain portfolio choices

3.2.2 Factors affect to investment policy objectives

Individual investors' decision-making is significantly influenced by various personal factors, including personality traits, life experiences, and unique circumstances, which are often difficult to quantify These unmeasurable elements play a crucial role in shaping their financial choices.

Risks of individual investors

There are some main risks that both individual and institutional investors must face:

Market risk, often referred to as systematic risk, encompasses the elements that influence the broader economy or securities markets Key factors contributing to market risk include interest rate risk, currency risk, and inflation risk.

Interest rate risk refers to the potential for fluctuations in interest rates, such as Libor and Euribor, which can negatively impact the value of securities When interest rates rise, bond issuers are compelled to provide higher coupon rates on new bonds to attract investors, leading to a decline in the prices of existing bonds as investors gravitate towards the more lucrative options.

On the other hand, there's also interest-rate risk when rates fall because maturing bonds or bonds that are paid off before maturity must be reinvested at a lower yield

Currency risk refers to the potential for fluctuations in foreign exchange rates, such as EUR/USD or EUR/GBP, which can impact the value of assets held in those currencies This risk arises from the floating nature of many global currencies When converting money for investment purposes, any changes in exchange rates can either enhance or diminish the returns on an investor's investment.

Investors face currency risk primarily when they invest in international securities or funds that hold such assets However, this risk can be mitigated by strategically limiting the portion of their portfolio allocated to these investments.

VU THUY DUONG – ATCAK13 Page 17 investor’s portfolio to international investments and diversifying this portion across various countries and regions

Inflation risk refers to the potential changes in the prices of goods and services, which is closely linked to interest rate risk, as rising inflation typically leads to higher interest rates This relationship can diminish the value of investments, as lenders may require increased interest rates to offset the loss of purchasing power caused by inflation Consequently, existing bonds may lose value when newly issued bonds offer higher interest rates However, inflation can fluctuate in cycles; during periods of low interest rates, new bonds may also provide lower interest rates.

Credit risk is the potential that a borrower will fail to meet debt obligations, leading to default on payments This risk predominantly affects lenders, resulting in lost principal and interest, disrupted cash flows, and heightened collection expenses Losses can be either partial or total and may occur under various conditions.

Investors with bond portfolios should be aware of the varying levels of risk and return associated with different types of bonds Government bonds, particularly federal ones, are considered low-risk but offer minimal returns, while corporate bonds present higher risks accompanied by potentially higher interest rates Investment-grade bonds carry a lower likelihood of default, in contrast to junk bonds, which have a greater chance of default Moody’s bond rating services help investors distinguish between investment-grade bonds and junk bonds, guiding their investment decisions.

Liquidity risk refers to the potential inability to quickly trade a security or asset in the market, which may lead to financial losses or hinder profit realization This risk affects both the initiation and liquidation of transactions, impacting long and short positions, but is especially pronounced during the liquidation process.

The bid-ask spread serves as a key indicator of liquidity in traded securities, reflecting the difference between buying and selling prices In illiquid markets, dealers tend to set higher selling prices and lower buying prices to compensate for liquidity risk Monitoring transaction volumes is one of the most effective methods to assess liquidity; typically, a higher average transaction volume indicates a more liquid financial instrument.

Liquidity risk is a serious problem and often is difficult to observe and quantify

Certain securities may appear liquid at the time of purchase or short sale, but they can become illiquid by the time they are sold or repurchased to cover short positions.

Regulatory risk refers to the uncertainty surrounding how a transaction will be regulated and the possibility of changes in regulations In regulated markets, there is always a risk that the current regulatory framework may become more burdensome or expensive Conversely, unregulated markets face the threat of new regulations that could introduce costs and restrictions Estimating regulatory risk is challenging, as laws and regulations are influenced by political dynamics and can shift with changes in government.

VU THUY DUONG – ATCAK13 Page 19 parties and regulatory personnel Both the regulations and their enforcement often reflect attitudes and philosophies that may change over time

Asymmetric information refers to the unequal distribution of information among individuals, where some possess more knowledge than others This concept is especially significant in financial markets, as stock prices heavily rely on the information that buyers and sellers have regarding a company's productivity and profitability Individuals with superior information tend to excel in making profitable trades, effectively "buying low and selling high."

Compared to individual investors, institutional investors are faced with more risks:

Operational risk, also known as operations risk, refers to the potential for loss resulting from failures in a company's systems and processes or due to external events This type of risk can stem from various sources, including computer malfunctions such as bugs, viruses, and hardware issues, as well as human error and unpredictable external factors beyond a company's control.

Computer failures are frequent occurrences, yet advancements in backup systems and recovery protocols have significantly minimized their effects Although technology bugs and viruses pose serious risks, they are now more manageable with the right personnel, software, and systems in place.

Human failures include the typically manageable unintentional errors that occur in every business, along with more critical and potentially disastrous incidences of willful misconduct

Operational risk includes losses from external events damage from fires, floods and other types of natural disasters, but insurance provides only cash compensation for

VU THUY DUONG – ATCAK13 Page 20 highlights that companies often face operational risks, which can lead to significant losses While some mitigate these risks through insurance contracts that transfer the risk, the majority adopt a proactive approach This includes closely monitoring their systems, implementing preventive measures, and establishing comprehensive response plans to effectively address any potential incidents.

Managing risks

Diversification is a proven strategy for reducing risk in an investment portfolio By allocating funds across various asset classes, security types, geographic regions, and risk profiles, investors can create a balanced portfolio This approach aims to achieve target returns while lowering the likelihood of significant losses, ultimately enhancing overall portfolio stability.

A diversified portfolio is crucial for managing investment risk, as the allocation of capital among various asset types, such as stocks and bonds, significantly influences potential losses and returns Portfolios primarily composed of stocks can yield substantial short-term gains, but they also expose investors to rapid declines during market downturns To mitigate this risk, many investors include fixed-income instruments, which typically exhibit lower volatility However, this reduced volatility may result in slower growth that fails to keep pace with inflation A balanced investment strategy that combines both stocks and fixed-income assets allows investors to pursue growth while providing a buffer against market fluctuations, although it is important to note that no investment is entirely risk-free.

VU THUY DUONG – ATCAK13 Page 21 proper portfolio allocation may be useful in aligning an individual investor’s needs and goals with their tolerance and capacity for risk

Geographical diversification involves spreading an investment portfolio across various regions to mitigate risk and enhance returns By investing in different geographic areas, investors can decrease their exposure to political and economic fluctuations If one resource is situated in a region prone to disruptions such as natural disasters or civil unrest, assets in more stable locations can help balance the overall portfolio This strategy effectively lowers volatility and minimizes exposure to external risks.

Diversifying an investment portfolio involves spreading investments across low-, medium-, and high-risk categories Low-risk investments typically include government-backed securities, offering safety and stability Medium-risk investments allow for some fluctuation in value, aiming for above-inflation returns over the medium to long term, often through a mix of shares and fixed-interest securities High-risk investments, on the other hand, involve a greater acceptance of volatility in pursuit of significant capital growth, primarily focusing on shares with limited exposure to fixed-interest assets This strategy results in frequent and substantial value changes throughout the investment period.

Investment diversification is a well-known strategy to mitigate investment risk Another effective method for reducing risk is hedging, which can be likened to insurance; while it doesn't stop adverse events from occurring, it lessens their impact if they do happen Individual investors often employ hedging techniques to manage different types of risks.

Reducing risk in investments often leads to lower potential profits When an investor hedges against a profitable investment, they typically forfeit some of the gains they could have earned Conversely, if the investment incurs a loss, a successful hedge can help mitigate that loss.

Hedging techniques generally involve the use of complicated financial instruments known as derivatives

A forward contract is a legally binding agreement between two parties to set the price of an asset today for future delivery and payment These contracts can be customized to suit the needs of both parties and can be substantial in size By entering into a forward contract, investors can significantly reduce their price risk, although it does not eliminate all uncertainties, especially regarding quantity While it protects against adverse price movements, it also means that investors miss out on potential gains if prices rise favorably Additionally, investors must invest time and resources to assess the credit risk of their counterparty Forward contracts are predominantly utilized to hedge against exchange rate risk.

A futures contract is a legal agreement to buy or sell a specific asset at a predetermined price on a set future date In this arrangement, the seller is obligated to deliver the asset to the buyer, who, in turn, must pay the agreed-upon price at the contract's expiration This mechanism is commonly utilized in stock futures trading, allowing investors to hedge or speculate on price movements.

A short hedge refers to a position in stock where an investor aims to mitigate risk by selling futures, while a long hedge involves purchasing stock futures to secure current prices Both futures and forwards offer similar risk reduction capabilities, making them effective tools for managing market exposure.

An option is a unique form of futures contract that grants the buyer the right, but not the obligation, to purchase an underlying asset at a predetermined price from the seller In this arrangement, the seller is required to deliver the asset if the buyer chooses to exercise the option The buyer pays an upfront fee, known as a premium, to the seller for this right If the buyer fails to exercise the option within the specified timeframe, it expires and becomes worthless.

Before an individual investor opts for hedging, it's crucial to weigh the benefits against the associated costs, as every hedge incurs an expense This unavoidable cost represents the price paid to mitigate uncertainty in investments.

Individual investors often prefer mutual funds over individual stocks due to several key advantages, including diversification, which helps spread risk; convenience, as mutual funds simplify the investment process; and lower costs, making them a more economical choice for many investors.

Mutual funds offer undeniable convenience, making them a preferred choice for investors seeking to manage the equity portion of their portfolios without the hassle of buying individual shares The process of determining asset allocation, researching stocks for growth potential, and monitoring market trends can be time-consuming and complex, often requiring dedicated expertise While investing in mutual funds does not guarantee an increase in value, it simplifies the investment process and helps mitigate some of the intricate decision-making associated with stock investing.

High trading costs for buying and selling stocks can significantly impact individual investors, often negating potential gains from price appreciation In contrast, mutual funds distribute trading costs among all investors, resulting in lower expenses for each individual.

CURRENT RISK SITUATION OF VIETNAM INDIVIDUAL

Overview of individual investors in Vietnamese stock market

4.1.1 Number of individual investor accounts

Figure 1: Number of investor accounts

The stock market is witnessing a significant surge in investor participation, as evidenced by a dramatic increase in account transactions From nearly 3,000 accounts in 2000, the number skyrocketed to approximately 1,056,000 by 2010, reflecting a growth of over 300 times.

In 2011, the SSC reported that the total number of stock trading accounts reached 1,170,000, highlighting the rapid development and potential of the stock market Despite this growth, only 20-35% of accounts at major securities firms were active, indicating a disparity in market engagement.

"virtual" accounts and "dead" accounts accounted for a significant portion

In December 2012, the total number of trading accounts reached 1,260,000, with 7,869 new accounts opened that month This included 111 accounts for domestic organizations, 7,701 accounts for domestic individuals, 14 accounts for foreign organizations, and 35 accounts for foreign individuals.

In 2013, investor accounts surged to nearly 1.3 million, marking an increase of 57,000 from 2012, with foreign investor accounts rising by 29% The total value of foreign capital also saw a significant growth of 56% compared to the previous year By year-end, the net flow of foreign capital reached $122 million, contributing to a 42% increase in the total value of portfolios.

=> The number of investors participating in the stock market has increased continuously over the years The number of new accounts opened in 2011, 2012 and

2013 was 114,000, 90,000 and 40,000 accounts respectively Within 4 years, from

Between 2010 and 2013, trading accounts surged by 40%, but the growth in new account openings declined due to stock market restructuring In 2013, securities firms prioritized consolidating their systems and enhancing existing accounts over acquiring new ones.

4.1.2 Size of individual investor transactions

While specific statistics on the average daily trading volume of individual investors are unavailable, I compared the average daily trading volumes of two investment funds, VF1 and VF4, against the overall market's average This analysis highlights the significant role that individual investors play in contributing to the total daily trading volume of the market.

VF1, Vietnam's inaugural public fund, has successfully attracted a diverse range of domestic and international individual and institutional investors With an initial chartered capital of VND 300 billion raised in just 10 days in April 2004, VF1 has transitioned into an open-ended fund, aligning with global investment trends.

The average trading volume of VF1 fund certificates achieved 113,595 fund certificates per day in 2011, 112,782 fund certificates per day in 2012 and about 150,000 fund certificates per day in 2013

VF4, the second public fund established and managed by VFM, launched in January 2008 with an initial capital of VND 806.46 billion (approximately USD 48.9 million) After five years of successful operation, VF4 transitioned into an open-ended fund, aligning with global investment trends to maximize benefits for its investors.

The average trading volume of VF4 fund certificates reached 47,000 fund certificates per day in 2011, 70,000 fund certificates per day in 2012 and 12,000 fund certificates per day in 2013

The average daily trading volume of the whole market (1)

The average daily trading volume of funds (2)

Figure 2: The average daily trading volume

(Source: Annual report in 2011, 2012, and 2013)

The average daily trading volume of funds represents only a small fraction of the total market volume, with individual investors driving the majority of trading activity Despite their limited financial capacity compared to institutional investors, the high frequency of transactions by individual investors plays a crucial role in contributing to daily stock market fluctuations.

Survey on individual investors in the stock market

A total of 150 questionnaires were distributed to individual investors at the HNX, yielding 114 responses and resulting in a response rate of 76% The sample of 114 respondents is characterized by various demographics, including gender, age, and duration of participation in the stock market.

Figure 3: Gender of individual investors in the surveyed sample

The study features an equal representation of male and female investors, with approximately 50% of each gender, ensuring that gender bias does not influence the findings.

Figure 4: Age of individual investors in the surveyed sample

The majority of stock investors are aged between 26 and 45, with 39.5% of respondents aged 26-35 and 45.6% aged 36-45 Only 3.5% are aged 18-25, and 11.4% are in the 46-55 age group, indicating a significant presence of younger investors at the HNX This demographic trend suggests that individual investors under 45 are more active in the market, particularly those aged 36-45, who have accumulated wealth and achieved basic life milestones, allowing them to invest more Conversely, investors aged 26-35 participate in larger numbers but tend to invest smaller amounts due to ongoing financial obligations As investors age, their participation typically declines as they shift towards safer investment strategies, with the lowest engagement seen among those aged 18-25, who primarily seek to apply their academic knowledge in real-world scenarios.

Figure 5: Time of investment of individual investors in the surveyed sample

A significant majority of investors in the sample have relatively short experience in the stock market, with 53.5% having participated for less than three years and 30.7% for less than one year Only 13.2% of respondents have been involved for more than three but less than five years, while a mere 2.6% have engaged in the securities market for over five years but less than ten These statistics indicate that individual investors typically engage in short-term stock market participation.

Have you ever been trained in any course of security exchange?

Figure 6: The qualification of individual investors in the surveyed sample

A recent survey reveals that 78.07% of individual investors have completed stock trading courses, indicating a strong understanding of the stock market among them Various stock investing courses, ranging from short to long-term options, are available in the Vietnamese market, organized by securities research centers, companies, and universities These educational programs aim to equip individual investors with the necessary knowledge and confidence to engage effectively in the market As a result, many investors actively seek out these courses to improve their skills and gain a competitive edge.

Figure 7: Factors affecting the investment behavior of individual investors in the surveyed sample

Factors afecting the investment behavior

Psychology significantly influences investment behavior among Vietnamese individual investors, primarily due to the prevalence of "herding behavior." Current wealth status also plays a crucial role, as wealthier investors tend to embrace higher risks, whereas those with less wealth are more cautious Additionally, personality traits impact investor decisions, but the ability to learn from past experiences remains limited among investors.

Figure 8: Risks of individual investors in the surveyed sample

A significant 58.77% of individual investors in Vietnam recognize the challenge of information risk in the investment securities market The phenomenon of "asymmetric information" is becoming increasingly relevant, highlighting concerns about the inadequate compliance with legal requirements for information disclosure by issuing organizations While Vietnam's regulations on information disclosure in the stock market are comprehensive, the timely announcement of information by these organizations remains a critical issue.

On March 21, 2014, the SSC imposed fines of 50 million VND on Yen Bai Cement and Minerals Joint Stock Company and 60 million VND on Ha Lam Coal Joint Stock Company – Vinacomin The SSC found that Yen Bai Cement failed to disclose information in its 2011 Annual Report and 2012 Corporate Governance Report, as well as timely financial statements for the years 2011, 2012, and 2013 Similarly, Ha Lam Coal – Vinacomin was penalized for not providing information on its electronic platform regarding management reports, annual reports, shareholder meeting resolutions, and for not timely disclosing financial statements in 2012.

2013 Earlier, on 20/3/2014, the SSC also fined Huu Lien Asia Joint Stock Company

70 million due to disclosure information beyond the time limit prescribed

The credibility of financial statements often obscures the true business condition of enterprises, creating a significant information gap between mandatory disclosures and what listed companies actually publish This disparity in financial data, particularly before and after audits, has become a pressing concern in today's stock market.

In 2013, PetroVietnam Construction JSC reported significant discrepancies in its audited financial statements, with net sales declining from 5,096 billion VND to 4,962 billion VND The company experienced a gross profit of 54 billion VND, contrasting sharply with a gross loss of 238 billion VND from the previous year Additionally, revenue indicators fluctuated by hundreds of billion VND, while auditors faced challenges in accurately assessing issues like the debt situations of subsidiaries and associated companies Meanwhile, Vietnam Construction and Import-Export JSC noted a nearly 50 billion VND drop in after-tax profit for shareholders, alongside a more than 240 billion VND decrease in net revenue post-audit.

Asymmetric information hinders individual investors from differentiating between high-performing and poorly performing companies, which significantly impacts their investment decisions and potential returns.

Many individual investors worry about the liquidity of the market 50.88% of individual investors surveyed believe that they must face with liquidity risk

On May 5, 2014, HNX announced the delisting of three companies: Yen Bai Cement and Minerals JSC, International Labour and Services JSC, and Nam Vang Corporation, due to their continuous losses over three consecutive years (2011-2013) as per Decree 58/2012/ND-CP Following their delisting, the stock prices of these companies declined, making it challenging for investors to trade their shares.

The number of shares delisted increase continuously over the years (22 shares were delisted in 2012, 37 shares were delisted in 2013) In the first 4 months of 2014,

17 shares have been delisted Unlike the situation in 2013 when the shares were delisted to restructure the company, the delisting of shares recently mainly due to losses for consecutive years

Following the announcement of delisting, stock prices typically decline as investor confidence wanes, leading to a reduced willingness to retain these shares This decline is primarily due to the significantly diminished ability to transfer shares post-delisting Consequently, investors who continue to hold these stocks are confronted with substantial liquidity risk.

Only 30.70% of individual investors surveyed must face with interest rate risk This ratio is perfectly in line with market developments From 2011 to now, the deposit rate fell sharply, by about 7-10% / year compared to the middle of 2011 The low and

VU THUY DUONG – ATCAK13 Page 35 stable interest rate helps securities investment channel become more attractive in the relationship between profit - risk and stabilize the value of securities

Figure 9: The relationship between interest rates and vn-index

Between March 2011 and March 2014, interest rates plummeted from 14% to 6% per year, resulting in a significant increase in the VN-Index, which rose from below 400 points to over 600 points Notably, on March 17, the first trading day following the interest rate reduction, the VN-Index set a new record by surpassing 600 points This trend highlights the strong correlation between interest rates and the VN-Index, as lower interest rates positively influence investor sentiment and market performance.

Firstly, the low and stable interest rate helps securities investment channel become more attractive to individual investors in term of income

Secondly, lower interest rates will help stabilize the value of securities for investors, and avoid wild fluctuations in the stock price

Similarly, 30.70% of individual investors surveyed must face with inflation risk

SOLUTIONS TO MANAGE RISKS

Solutions to improve the operational efficiency of investment funds

5.1.1 Improving the quality of managers and human resources

The success of investment funds is significantly influenced by the qualifications of professional investment managers, as evidenced by the experiences of various countries Individual investors frequently select investment funds based on the expertise and talent of the fund's professional investors.

In many countries, investment funds are managed by professional investment managers who oversee daily operations and execute investment strategies These managers are supported by financial analysts who assist in the fund's overall management and decision-making processes.

Professional managers of securities investment funds must possess in-depth knowledge and adhere to strong ethical standards to build public trust This necessitates a comprehensive and structured training program designed to cultivate skilled investment fund managers.

Investment funds must establish effective treatment regimes to retain qualified staff and encourage the growth of their team Additionally, organizing specialized training courses is essential for staff development Furthermore, creating conducive environments for research and continuous learning is crucial to enhance employee capabilities and adapt to the changing market demands.

Investment funds must prioritize information disclosure, as it plays a crucial role in attracting investment capital By providing transparent details about their activities, funds enable investors to make informed decisions regarding their investments.

VU THUY DUONG – ATCAK13 Page 42 decisions and enhance the reputation of the fund management companies and the investment managers when the funds operate effectively

Disclosure of information regarding securities investment funds significantly impacts investors' assessments of fund certificate value By providing insights into fund activities and business performance, this transparency aids investors in making informed decisions about whether to maintain or withdraw their investments.

Timely disclosure of information is crucial to ensure that investors receive updates simultaneously In developed financial markets, details regarding investment funds and securities are published in financial magazines and announced at the headquarters of fund management companies or through securities agents Additionally, the daily ranking of investment fund activities aids investors in making informed investment decisions.

Investment funds should enhance their marketing and outreach efforts by organizing investor meetings and effective promotional activities These initiatives will facilitate the attraction of idle public capital, thereby expanding the funds' capital base Additionally, it is essential for investment funds to implement annual policies that prioritize investor engagement through various channels, such as hosting customer conferences, developing informative websites about the funds, and providing regular reports on both the overall stock market and the fund's specific activities Keeping investors informed about net asset values and stock market dynamics is crucial for building trust and fostering long-term relationships.

5.1.4 Expanding capital scale and enhance operational efficiency

Investment funds can expand their scale by issuing additional fund certificates or creating new funds Fund management companies often distribute these certificates through underwriting organizations with extensive operational networks, including securities firms and commercial banks.

Domestic investment funds in Vietnam must enhance their operational efficiency to successfully raise capital from the public By concentrating on both listed and unlisted securities within the Vietnamese stock market, these funds can boost the value of joint stock companies This strategic investment will facilitate financial restructuring, improve management systems, and strengthen competitiveness, ultimately leading to an increase in the value of the investment securities held by the funds.

Investment funds must adopt a proactive approach to capitalize on opportunities, boost profits, and improve net asset value (NAV) by flexibly adjusting their portfolios Additionally, they should focus on converting book profits into actual profits, ensuring timely dividend payments to investors at the end of the financial year, and striving to sustain NAV growth It is also essential for these funds to maintain or exceed the previous year's dividend rates in subsequent years.

Fund management companies must implement robust credit monitoring systems and diversification strategies to mitigate risks associated with the inability of issuing organizations to repay principal or interest on investments in government, municipal, and corporate bonds.

Solutions to develop derivatives market

The derivative market is becoming essential for mitigating risks faced by investors and financial intermediaries By effectively screening, transferring, and distributing risks, it enhances the overall functionality of financial markets, broadens capital-raising activities, lowers capital costs, and fosters an environment conducive to economic growth.

However, to be able to build a standardized derivative market, it is necessary to build and complete the following conditions:

To foster an environment of free competition and equality, it is essential to clearly regulate the market's operational mechanisms, ensuring long-term stability and encouraging public participation In the derivatives market, the key to expanding its scale lies in enhancing the liquidity of these financial instruments, which facilitates active trading and business transactions Consequently, implementing effective mechanisms to boost the liquidity of derivative transactions is crucial for market growth.

Understanding among personnel at financial institutions is crucial for effectively implementing financial derivative transactions Institutions must ensure they have a qualified and experienced workforce capable of managing these complex instruments Employees should possess in-depth knowledge of market dynamics, volatility, various derivative instruments, valuation methods, associated risks, and regulatory frameworks Additionally, financial institutions should promote specialization among their staff, designating roles for traders, risk management professionals, and accounting experts to enhance operational efficiency.

The integration of information technology in market activities is crucial, as outdated technology can hinder the complex valuation required for derivative financial instruments Most derivative transactions occur over the phone, with dealers representing their partners, and recorded dialogues serve as evidence for future negotiations Implementing electronic payment technology enhances the accuracy and efficiency of transactions Additionally, staying updated on market trends and the types of goods traded enables financial institutions to make informed decisions regarding the effective use of derivative instruments, ultimately mitigating business risks.

Solutions to improve the quality of information in the stock market

5.3.1 Solutions to provide transparency of information

To enhance the effectiveness of securities laws, it is essential to improve the legal documents that guide their implementation Additionally, strengthening surveillance activities and ensuring transparent information disclosure regarding the financial status of entities required to publish information on the stock market are crucial steps for maintaining market integrity.

Credit rating agencies play a crucial role in assessing the willingness and ability of organizations to meet their debt obligations, including principal and interest payments Their evaluations focus on the operational effectiveness and future prospects of the entities they analyze, providing valuable insights for investors and stakeholders.

VU THUY DUONG – ATCAK13 Page 46 risk rating of the organizations, and provide evaluation of debt securities and equity securities

5.3.1.3 Improving accounting and auditing system

To enhance transparency and accuracy in enterprise financial statements, it is essential to reform accounting and auditing standards and provide clearer guidelines to prevent misunderstandings Many listed companies refrain from summarizing financial statements, which contributes to a lack of clarity and transparency in their financial reports.

Enhancing the information disclosure system is crucial for enabling investors to access information swiftly, accurately, and equitably To guarantee the reliability of this information, the State Securities Commission must focus on promoting and improving the quality of audits for listed companies.

5.3.1.4 Improving the quality of listed companies

Listed companies must prioritize the timely and adequate provision of information by establishing a dedicated disclosure department staffed with highly qualified professionals who uphold strong ethical standards This team is responsible for delivering accurate and comprehensive information, enabling investors to optimize their investment strategies Additionally, enhancing the internal control system is essential for improving the transparency of public information within these companies.

Listed companies establish their websites to provide regular and comprehensive updates to investors regarding essential information such as business operations, financial health, and human resource changes Additionally, fostering strong relationships with investors is crucial for these companies.

5.3.1.5 Improving the quality of securities companies

- Grasping thoroughly the principles of security information, feedback honestly information about securities, listed companies

- Constructing staffs having knowledge, experience and responsibility, professional ethics and creating trust with investors, applying timely the progression of information technology

- Diversifying channels which provide information to customers

- Investing and implement an information technology system to ensure the securities activities, and invest between information infrastructure and adequate security systems in a synchronous way

Developing an investment advisory service enhances the range of offerings for brokers, creating an effective channel for delivering valuable information to customers, ultimately benefiting both clients and the company’s profitability.

5.3.1.6 Improving the quality of stock exchange

- Establishing department to assess quality of information disclosure and information channel between stock exchanges and participants in the market

- Strengthening inspection and monitoring activities related to information disclosure Stock Exchanges need to monitor the information disclosure Effective supervision is important to build trust in the investors

- Executing judicially information disclosure among investors, which means the disclosure must at the same time, avoid information leakage

- Coordinating with ministries, branches to implement the management role towards stock companies issuing securities to the public, create a stepping stone to

VU THUY DUONG – ATCAK13 emphasizes the importance of flawless management in the information disclosure process and the complete realization of securities holders' rights in listed companies It advocates for enhanced communication with investors via the websites of the State Securities Commission of Vietnam and the Stock Exchanges.

5.3.2 Solution of the information infrastructure

5.3.2.1 Upgrading and developing information technology systems

To address the issue of trading order overload and ensure fairness and transparency in transactions, stock exchanges must invest in modern technological equipment to enhance their trading systems By developing a trading system that connects securities companies with the stock exchange, the burden on trading floors can be alleviated, facilitating the efficient processing of accepted orders on the Stock Exchange.

5.3.2.2 Improving the quality of the stock market news

The stock market news is the official announcement of the Stock Exchange Therefore, stock exchange need pay more attention to improving the quality of the stock market news

As information technology continues to advance, investors increasingly turn to electronic newspapers for insights, making it essential to enhance the quality of these websites promptly and comprehensively In addition to providing updates on policies and transactions, these platforms should also offer in-depth coverage of the international financial landscape and the country's macroeconomic conditions.

5.3.2.3 Improving the capacity of the media

Journalists, employees writing about the securities on the media should be provided further technical to analyze securities To accomplish this, the management

Agencies should establish training courses for groups focused on enhancing their expertise in the accurate assessment and evaluation of the stock market This initiative will improve the quality of media articles and securities categories, providing essential information that assists individual investors in making informed investment decisions.

Investors should actively seek information, and improve the ability to observe and find information, proficient in the selection of useful information that really influence to their decisions

Investors must actively participate in securities courses, learn basic knowledge of accounting, as well as other knowledge related stock market to enhance the ability to handle information sources

The best solution to control risks is that investors should choose a variety of stocks in different sectors and areas with different scale to spread and eliminate risks

To effectively manage their portfolio, it is crucial for investors to regularly collect data from multiple sources, particularly focusing on audited financial statements of the listed companies This diligence enables them to swiftly eliminate stocks that pose significant risks, such as those involved in financial fraud, disseminating misleading information, or engaging in high-risk projects.

They need frequently adjust their portfolio by selling or buying securities in the portfolio accordance with the changes of the market

To stay competitive, it is essential to continually enhance knowledge of macroeconomics and keep abreast of the evolving macroeconomic and political landscapes A particular focus should be placed on understanding the cyclical nature of economic trends.

VU THUY DUONG – ATCAK13 emphasizes the importance of developing analytical skills related to the macroeconomic and political environments, as well as understanding the impacts of policies For those who may lack these skills, seeking consulting services from reputable securities firms is recommended.

Investors should regularly reflect on their investment experiences, as these insights are crucial for making informed decisions By recalling past encounters, they can swiftly navigate similar situations in the future This practice is particularly relevant in the stock market, where trends tend to repeat annually and follow cyclical patterns.

Tiêu đề	Solutions to Manage Risks of Individual Investors in Vietnamese Stock Market
Tác giả	Vu Thuy Duong
Người hướng dẫn	Tran Thi Xuan Anh
Trường học	State Bank of Vietnam Banking Academy
Chuyên ngành	Foreign Language
Thể loại	graduation thesis
Năm xuất bản	2014
Thành phố	Hanoi

Định dạng
Số trang	63
Dung lượng	1,2 MB