Trading of Individual Investors

This study investigates the financial performance of individual investors in the stock market. We consider three different perspectives of financial performance of individual investors to offer significant evidence associated to the issue. We build a model to study whether or not the trading of individual investors before an event is predicting the short-term abnormal returns of the stock after the event. This study is providing further evidence to the growing academic literature about individual investors’ performance. The analyses are performed on data set provided by Finnish Central Securities Depository (FCSD) for four years from 2006 to the end of 2009. Performing statistical analysis, the individual net trading and cumulative individual net trading are calculated. Two different data sets are created to analyze the abnormal returns of individual investors around scheduled new and to analyze the same connection around non-scheduled news. The results suggest that cumulative net individual trading prior to an event does predict the cumulative abnormal returns after the event but the link is quite weak and varies when different time-horizons are used or only active individual investors are considered. The results show a positive correlation between individual investors buying stocks prior to earnings announcement and the positive abnormal returns of the stock on the day of the event and on the following day. This correlation turns to be negative when we consider longer time periods for abnormal returns. With non-scheduled news, we did not find such correlation when considering all individual investors but correlation was found when we considered only the most active individual investors. When we did not control for any kind of events, we found that individual investors seem to be investing in an informed way