Making investment decisions are often complicated, and financial knowledge is also important for evolving in stock market participation. Managing a portfolio involves a specific human capital investment in terms of effort and time from the investor to first familiarize himself
or herself with the concepts involved in investing and later on to follow the market development
to make justifiable financial decisions. Guiso and Jappelli (2003) stated that the extent to which consumers or investors are aware of available financial assets dependents on the incentives of asset suppliers to spread the information
about the instruments they issue. Moreover, Merton (1987) also pointed out that awareness
affects asset prices because those that are less widely known, and thus less commonly selected.
On the determinants of awareness, Guiso and Jappelli (2005) presented a simple model where
investors can learn about assets from distributors or through social interaction in several different
ways and different networks. They further supported that the probability of becoming aware
depends on distributor’s incentives to inform investors and that people buy assets when they are
aware of it. Hong, Kubik and Stein (2004) shown that social interactions also promote investment
in stocks. Furthermore, Guiso and Jappelli (2003) offered a direct test on the effect of social
learning or social interaction on awareness by providing insights into the mechanism by which
social learning affects stockholding. They further observed that besides learning from signals and
contacts with issuers and distributors, individuals often learn about investment opportunities from
peers who have been inform by financial intermediaries. Therefore social learning changes
distributor’ incentives and hence the optimal signal policy.

According to Grossman and Stiglitz (1980) and Verrecchia (1980) in their examination of how information on asset returns effect portfolio choice established that differences among investors are endogenous, and financial information reduces subjective uncertainty on returns. Rooij and
Lusardi (2007) in their paper shown that lack of understanding of economic and financial
information is a significant deterrent to stock ownership and that lack of literacy prevents
households from participating in the stock market. Awareness of the existence of stock (financial
asset) is exogenous to the investors’ choice set. Issuers and distributors of financial assets have
strong incentives to inform the pool of potential investors; broadening the investor base lowers
the cost of raising external capital for issuers and increases revenue for distributors and this can
be done by mailing, advertising in the financial press or with direct contact to potential investors.
Guiso and Jappelli (2005) used data to construct summary indicators of financial awareness,
where one of the measures of financial awareness is the number of assets that each individual
knows divided by the number of potential assets. The second measure is an index that gives less
weight to popular assets (such as checking accounts) than other assets that are less widely known
(such as corporate bonds and mutual funds), and they weighted the index by the inverse of the
proportion of people aware of the assets and scaled it by the sum of the weights. Issuers will
target the individual (groups) that have a greater probability of investing in the stock market.
Secondly, individuals are more likely to be aware where the cost of sending signals is lower, for
instance in areas where the cost of contacting investors is relatively low. Thirdly, awareness
should be higher in areas where one can learn from peers as well as from the general media and
from intermediaries.