Factor analysis is used to find factors among observed variables. In other words, if your data contains many variables, you can use factor analysis to reduce the number of variables. Factor analysis groups variables with similar characteristics together. Therefore with factor analysis you can produce a small number of factors from a large number of variables which is capable of explaining the observed variance in the larger number of variables. One can use the reduced factors for further analysis.
When is factor analysis applied?
You may be interested to investigate the reasons why customers buy a product such as a particular brand of soft drink (e.g. coca cola). Several variables were identified which influence customer to buy coca cola. Some of the variables identified as being influential include cost of product, quality of product, availability of product, quantity of product, respectability of product, prestige attached to product, experience with product, and popularity of product. From this, you designed a questionnaire to solicit customers’ view on a seven/five point scale, where 1 = not important and 7/5 = very important.
Factor analysis in SPSS
- Step 1: From the menu bar select Analyze and choose Data Reduction and then CLICK on Factor. Highlight related variables and send them to “Variables”. Nothing has to be put into “Selection Variables”. (See Figure 1 below).
- Step 2: CLICK on the DESCRIPTIVES button and its dialogue box will load on the screen. Within this dialogue box select the following check boxes Univariate Descriptives, Coefficients, Determinant, KMO and Bartlett’s test of sphericity, and Reproduced. CLICK on Continue to return to the Factor Analysis dialogue box (figure 2).
- Step 3: From the dialogue box CLICK on the EXTRACTION button and its dialogue box will load on the screen. Select the check box for Scree Plot (untick the “Unrotated Factor Solution” option). CLICK on Continue to return to the Factor Analysis dialogue box (figure 3).
- Step 4: From the dialogue box CLICK on the ROTATION button and its dialogue box will load on the screen. CLICK on the radio button next to Varimax to select it. CLICK on Continue to return to the Factor Analysis dialogue box (figure 4).
- Step 5: From the dialogue box CLICK on the OPTIONS button and its dialogue box will load on the screen. CLICK on the check box of Suppress absolute values less than to select it. Type 0.50 in the text box. CLICK on Continue to return to the Factor Analysis dialogue box. Click on OK to run the procedure. The dialogue box should be completed as shown below (Figure 5).
- Step 6: Finally, CLICK on OK on the main Dialog Box, and results would appear in the Output SPSS file. The interpretation of the Analysis Results has been presented in the next article.
- Step 7: The next article will discuss the interpretation of its output i.e. Interpretation of Factor Analysis using SPSS.
- Risk tolerance by stocks categorization using ratio analysis - September 10, 2020
- Methodology to analyze the dynamic behavior of investors in the Indian stock market - September 4, 2020
- An introduction to stock market trend analysis - July 31, 2020