The Relationship Between Financial Literacy and Stock Market Participation by Retail Investors in Kenya

Abstract

The main focus of this study was to establish the nature of the relationship between financial literacy and stock market participation by retail investors in Kenya. The study employed a descriptive survey design. The target population was 836,250 retail investors participating in the NSE as at March 2013. A sample of 46 respondents was selected from five major stock brokerage firms based in Nairobi. Data was collected using questionnaires and subsequently analyzed using descriptive statistics. The data is presented in form of charts and tables. The study revealed that retail investors have a high level of financial literacy. Although many of them rate equity stocks as an investment just like others, a majority of them would prefer investing in other asset classes such as real estate. The results indicated that decision to invest in stocks was influenced by various economic factors, such as, expected dividends, capital appreciation, affordability of shares and fluctuations in market indices among other factors. The study also sought to establish effects of financial literacy, gender, age, and income on stock market participation. The findings conclude that these factors strongly influenced the level of stock market participation. This study recommends that the CMA and NSE should implement a comprehensive and public financial literacy programme that targets non-stock market participating public and financial market intermediaries should adopt strategies to bridge age and gender demographics that do not participated in the stock market. The study concluded that there is a positive relationship between financial literacy and stock market participation by retail investors in Kenya.