Limited Household Participation in the Stock Market Phenomenon Analysis

LIMITED HOUSEHOLD PARTICIPATION IN THE STOCK MARKET PHENOMENON ANALYSIS TABLE OF CONTENTS 1. INTRODUCTION3 2. FACTORS THAT DETERMINE shop use uping DECISION OF HOUSEHOLDS4 2. 1. riches4 2. 2. In consecrateigence quotient (IQ) and cognitive skills4 2. 3. tuition4 2. 4. Country4 2. 5. Information availability and succour to trade6 2. 6. food merchandise consecrate6 2. 7. Age7 2. 8. Marital place7 2. 9. Sociability ( kindly inter passageion)8 2. 10. Personal set9 2. 11. Life satisfaction9 2. 12. Health10 2. 3. Risk antipathy10 3. CONCLUSIONS12 4. REFERENCES13 1. INTRODUCTION at that place atomic number 18 a lot of queryes made to seatigate the reasons why firms interlocking in the timeworn grocery is comparatively low. According to the takingss, scarce 21% of EU houses participate in rakehellholdings (European keep an eye on of Consumer Finances, 2009). This looks irrational because the bulk of the society members do non capture their chance to win step-upal b enefits from their riches in the derivation securities industry.The purpose of this exploratory research is to put whiz across into account general insights or so current term of menages line mart involvement and explain the variables that have yields on dribbleholding decision by households. Currently, the households sit downment train can be treated as market inefficiency due to irrational or unconscious households behavior. However, in that location is a number of external reckons that influence the decision making in this field too.The statistics from variuos countries require differences sluice among highly developed countries with similar GDP per capita like Italy with 14% and UK with 26% households caudexholding aim (European Survey of Consumer Finances, 2009). This means that on that point be externalities that lead to such(prenominal) differences and non just irrational households behavior moderate the situation. To draw the full picture, this res earch focuses on twain attri furthithers of operators internal and external. The following chapters include short analysis of the main factors that have doctor on household strainholding decision and the summary. . FACTORS THAT DETERMINE STOCKHOLDING DECISION OF HOUSEHOLDS 2. 1. Wealth Wealth refers to accumulated tangible and intangible assets. It is obvious that for express investing households need to have some tangible assets to buy transmits. at that placefore, wealth is wiz of the main factors that determine whether a household can real invest, or in other words, convert savings to investment. According to the survey, 31% of respondents in EU state that they have some savings still do not participate in any pattern of investing (European Survey of Consumer Finances, 2009).Households fathering to invest face a number of cost such as time spent to understand the stock market system of rules, buy the farm familiar with markets situation and trading flow. It may seem that the knowledge defecate does not cost anything but on that point atomic number 18 opportunity costs when it comes to time. Other than that, there atomic number 18 also some direct tangible costs like transaction costs, taxes and other fees for the broker maturate. Of course for wealthier households this kind of barriers atomic number 18 slight relevant, however, forgetfuler households might be considering if possible benefits popweigh the costs. . 2. Intelligence quotient (IQ) and cognitive skills IQ is probably the most common measure to assess serviceman intelligence. there is no doubt that beneficial stockholdings requires appropriate level of intelligence to crystalize dandy investing decisions. According to recent researches, there is a correlation between IQ and meshing in stock market (IQ and line of work food market Participation, 2011). Households heads with high IQ tend to diversify, hold mutual funds, much stocks and eventu aloney bear lower perils with higher returns.In addition to IQ, it is worth to mention cognitive skills that have pertain on participation and successfullness of stockholding. Good cognitive skills lead to lower time costs for getting knowledge and higher aw arness that argon so authoritative for investing. 2. 3. Education In general, study provides a lot of advantages for societies and its members. Self victimisation is crucial to gain cognitive skills, general knowledge, increase awargonness and gain variuos experiences. These atomic number 18 the traits necessary for successful participation in stock markets.It is proved that education has positive correlation with households stockholding participation. More specifically, even ane excess year of schooling increases the possibility of participation by 7% 8% ( take market participation and household characteristics in Europe, 2010). Moreover, decisions making of educated households heads be more rational. 2. 4. Country As it is menti supe rstard in the introduction, divergent countries have created dissimilar environments for stock markets and, therefore, this is cardinal more factor that can influence households stockholding decision.More specifically, governments can influence investment climate by adjusting such variables as taxes, laws, infrastructure, education, general countrys stability and even more. The Figure 1 below represents country specific percentage of households having direct and indirect stockholding between 2006 and 2007 ( line of credit market participation and household characteristics in Europe, 2010). Figure 1. Stock market participation and household characteristics in Europe, 2010. In order to break the opportunities for households to participate in tock markets, while at the same time to make it easier to enter the above-mentioned markets to new entrants, and to improve the determines of participation for existing participants, and in the long run to ensure the stability of fiscal m arkets, government often takes appropriate actions, whose has a relatively high impact on the set ahead training of stock markets. Government must ensure the macro economic stability of pecuniary markets, while at the same time they must ensure the existence of an return economy.A theory of an open economy is very historic on the development of stock markets, because save in this case plurality and companies can freely trade in goods and services with other people and businesses, so that has a study impact on the harvest of financial markets. Another neccessary condition for the success of any stock market is its repayment of stock dividends coating before making any type of investment it must be ensured that stockholders will be allowed to get their dividends at a pre-determined time and at a pre-determined make senses.Talking round ensuring the light trading process, European Union in 2004 released the EUs marketplaces in financial Instruments Directive (MiFID) (t his directive was enforced three years later, in 2007), in order to open the approach to the creation of new trading platforms directly operated by intermediaries, and in 2008, ennead major investment banks (BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Societe Generale and UBS) has launched new pan-European equities trading platform (based in London) called Project Turquoise.Has this directive had an impact on stock markets? Yes. The number of this directive led European Union to increase competition and consumer vindication in investment services. In order to complete this section about relevant government efforts, we must conclude that the relevant government actions real has a meaning(a) effect on the g speechth of stock (and bond) markets, promotes fair trade among all countries included in the process of buying / selling stocks, and eventually influences countrys economic level to ncrease. But are these actions sufficien t comely in order to ensure the increase of the involvement of households in the stock markets in the future? 2. 5. Information availability and ease to trade Technologies and their development have huge impact on everyday households life. Although nowadays the majority of wealthy households have ability to use the Internet, dickens decades earlier this was unalike and households participation in stock market rate was different too.The research of impact of the Internet to stock market participation reveals that there are strong evidences that the Internet penetration contributed to increased amount of households participating in stock market (Stock Market Participation and the Internet, 2008). According to the same research, the employ of the Internet increases the possibility to have stocks by 7%. This is mostly because of ease of stock trading (online trading), lower transaction costs and lower culture costs. 2. 6. Market trustTrust is important factor for households decisio n to invest in stock market. Financial markets involve much find and uncertainty. To tell the truth, the majority of households whose invest in stocks dont fully understand how the capital markets actually function. in that location needs to be some faith and certainty in this process. If it is known that a certain somebody or a accompany is unreliable and untrustworthy, you, simply, dont want to have any kind of business and common interests with them. The same is with households.In deciding whether to buy stocks, investors takes into account the essay of being cheated, so those households, whose generally are more trusting, are also more likely to invest in the financial markets, and those who are less trusting are less likely to invest in the market. Collapses of financial markets and its t festinate participants individual companies (when fraud was initiated and tolerated by heads of major companies) not barely when lowers the distribution of expected payoffs, but at the same time reduces the pledge in the system, which generates these enefits. A prominent example company Enron. Enron was one of the biggest U. S. nil companies, however, when it was revealed lots of obscure in accounting procedures (it can be considered as a fraud), performed in 1990 on both Enron and its partner, accounting company Arthur Andersen, there was a nonstarter initiated on Enron it was the largest bankruptcy in U. S. history. Share toll fell from $ 90 to a few cents, and since those shares was considered to be very reliable, this bankruptcy was considered as disaster in the financial world.Companys shareholders lost roughly $11 billion. What do you think, what impact do these examples of companies breakdowns have on the growth in confidence in financial markets? 2. 7. Age Another kindle fact in observing limited household stock market participation phenomenon age. One of the factors that influence households decisions about stockholdings is the ages effect on danger tolerance. at that place was a research done, in order to identify the essay tolerance level within specified age groups, and it showed that the luck tolerance decreases within the age.According to a research done by Rui Yao, Michael S. Gutter, and Sherman D. Hanna, where they analyzed the effect of race and ethnicity on subjective financial risk tolerance, measuring age as a continuous variable, found out that each year increase in age decreased a probability of taking any type of risk by almost 2 %. Another factor, having significant impact on household investment decisions according to its age, is income.As this factor was discussed at one of the solution pages of this research paper, it is worth to remind that different age groups receives different amounts of wages, what has an impact on their ability to act and to invest in financial markets. Finally, it is an interesting fact that interpersonal trust (trust is our antecedently described factor due to limited househo ld participation in stock market, but this time this factor is viewed from a slightly different perspective) is more important for stock market participation decision within younger age groups and governmental penchant within older age groups. . 8. Marital status Its not a secret that matrimonial status is another(prenominal) important factor, which has a significant impact on households decisions whether to participate in the stock market or not. Married people are more willing to take (and share with each other) a certain level of risk than those, whose are life sentence alone, and those, whose are living together, but are not married at all. There was a research done in order to identify the effects of conjugation and divorce on financial investments.According to this research, women are more likely to invest in the stock market afterwards their jointure, and take back their investment after divorce, while at the same time men shows sooner different patterns on investment decisions. This suggests that the female grammatical gender is more risk averse than men (risk averse is also identified as one of the factors that has an impact on households investment decisions in the stock market), but in terms of couples who are married, a degree of risk more or less evenly distributes among themselves.It is worth to mention that marriage increases the likelihood of future investments in the financial markets for both men and women. There are lots of household finance literature available both online and in libraries, where it is often highlighted the differences in men and women behaviors while investing (marital status, as one of the factors having impact on households decision whether to participate in stock market or not, can be analyzed in a little import different way.Thats reliable by gender and by risk level each gender has possibility to take on themselves). According to the literature, the differences on investment preferences between men and women are more exposed, when individuals rather than married couples are being analyzed, because as it was mentioned earlier, married investors takes more risk than single investors. A distribution in risk by gender, talking in terms of marital status, is not the only reason for limited household participation in stock market. There an be distinguished several different factors, attributable to marital status its changes in household risk preferences, changes in background risks, and, also, changes in economic resources. 2. 9. Sociability (social interaction) Is it not true that working with a good company of friends involves more fun and at the same time the boilersuit productivity increases? At the same time, dont you feel safer when you purchase a good, that was tested by people living in your environment, and it was recommended as a reliable and useful good?Another example would be a participation in any social program, where there antecedently participated, for example, your neigh bours or friends your decision-making process is very strongly influenced by the people of your environment, and here takes place the so-called phenomenon of word of mouth communication. all told these examples perfectly suites to define one more factor, which explains limited household participation in stock market phenomenon it is sociability, or, in other words, households social interaction.Harvard Business check provides us with an opportunity to observe their findings about sociabilitys impact on stockholding decisions. Firstly, according to a research done, social households those households, that has affable and warm relations with their neighbours, are more likely to participate in stock markets, than those, whose relations with their neighbours are ruined or there arent any neighbours in their environment. Secondly, as the proof of the first claim about sociability, researchers indicates that the impact of sociability is much more higher in those states with higher stock market participation rates.Quite unexpected, right? Finally, they found out that differential between social and non-social households appears to have widened since 1990s. We often encounter with word-of-mouth communications impact in our everydays life, but when you are trying to assess sociabilitys influence on household decisions whether to participate on stock markets or not, you then put one over the true power of a word. Word-of-mouth information sharing is key point in understanding sociability as another factor of limited household stockholding decisions, so we state that theres a significant impact of social interaction on such like household decisions. 2. 10. Personal values This research is gradually beginning to analyze not only the superficial factors, that affects household decisions related to stock market participation, but it also tries to look a little modus operandi deeper into personal characteristics of an investor. One of the most important internal fac tor, having a great impact on investors financial decisions, is personal values of an individual.A skilful definition of personal values would be that its the strongest internal provisions, having a large impact on our everyday decisions. Those everyday decisions are cave in know as our consumption decisions, they are also a major driver of our voting decisions and so on. Compared to other internal factors, such as risk crime or life satisfaction (those are our bordering two internal factors, whose will be discussed a little bit later in this research), studies about personal values and its impact on our everydays life are more preferable by todays researchers.According to their findings, personal values are connected to versatile demographic variables, i. e. Self-Transcedence and Openness to Change are the values that are proven to become more important when the level of education gets higher. It have also been proven that personal values are associated with social involvement , where, according to researchers, social involvement increases with the level of education. Finally, about two thirds of all studies shows that political orientation has strongest association with personal values.As every person has different values, the same is with political orientation as there are many factors affecting citizens lives, such as the income inequality, national security and so on, it is natural, however, that different values are emphasized in different environments. So whats a true effect of personal values on investment decisions? Firstly, people with self-enhancement values of power and achievement are more likely to invest in stock markets than the others.And secondly, it is observed that personal values have a significant impact on those groups of people and their decisions, where investing in stock markets is relatively rare. 2. 11. Life satisfaction Isnt it true that happier, more affirmative and genial with their life people embraces better decisions? Wh at are the differences between pessimistic and plausive people? Optimists are more likely to believe that future economic conditions will improve. On the other hand, it is observed that optimistic people are working longer hours, they are more likely to remarry after divorce.So, optimism and life satisfaction are other important factors influencing households economy-related decisions. There was a research by Cambridge universitys researchers done, where they found that optimism is highly correlated with stock ownership. People with higher levels of life satisfaction lives longer. Mostly. Therefore they think they are further from retirement, hence they are trying to find out financial factors that are known that could affect their lifespan.Its a fact, that people, whose are more quelled with their life, are working more, they are less pre-disposed towards retirement. What is more, it is more likely that one day theyll create any kind of business, so theyll become self-employed. Finally, optimistic people are more likely to remarry after divorce. All of this suggests that life satisfaction and optimism truly is a critical component of economic-decision making, and that those two factors plays an important intention both on household decisions related to stock market participation and economic welfare of stockholders. . 12. Health Health risk is increasingly viewed as an important form of background risk that affects household portfolio decisions. According to households level of health (whether its short or good) theres a possibility to detect whether household is willing to participate on the stock market or not poor health is associated with smaller amount of risky assets and greater amount of safe assets. Researchers are trying to evaluate the links between health, health risk and portfolio selection.Recently it was observed that it does not matter whether households are trying to control their level of income and variety of socio-demographic charac teristics, poor health decreases the probability of owning risky assets for example, those households with poor health entails a higher risk of unexpected out-of-pocket medical checkup white plagues, and prefers to own a corporate or government bond alternatively of holding a stock. Despite the fact that health risk rather often leads to a previously mentioned higher out-of-pocket medical expenditure risk, two possible outcomes can arise from such things.In particular, households may start changing the allocation of their financial resources, that can reduce their exposure to financial risk. On the second case, households can increase their precautionary saving, what reduces their ability to act in stock markets. At this point it is worth to mention that the handling of government organizations reduces the impact of health risks related to households stockholding decisions. Thats why it is observed that countries without adequate health care laws tends not to invest in risky f inancial assets, so this suggests an important division of such laws in shaping households portfolio decisions. . 13. Risk aversion Finally, last but not least factor, which had a significant role on this entire research. Thats risk aversion. Weve emphasized different levels of risks on our study and their impact on household stockholding decisions, such as health risk or the age effect on risk tolerance. It has became clear that risk aversion reduces the probability of households investments on risky assets. As the standard portfolio theory states, the amount of wealth a person wishes o invest in risky assets, depends directly on his degree of risk aversion, so it is logical to assume that if a person is more risk averse, he will hold safer portfolios. There was a research done several years in a row (from 1998 to 2001), where researchers found out that risk aversion has an effect not only on the structure of portfolio, but it also has an impact on the final decision whether an individual wants to become a stockholder (you should remember that previously we had a little discussion about that entry costs affects individuals stock market participation decisions, too).Finally, talking about risk aversions relation to other factors affecting stockholding decisions, it is found that risk aversion is negatively correlated with wealth. Thats true risk aversion decreases when wealth levels increases, and vice versa. To complete our discussion, another interesting fact it was identified, that women are more risk averse than men, however, differences between genders, tends to be larger in single households (remember what effect on households decisions on stockholding has marital status). 3. CONCLUSIONSIn general, all present researches about the topic agree that household stock market participation currently is not at the efficient point. There are a lot of complex factors that have impact on household stockholding decision and those have been discussed. However, some researchers observe even more correlations with stockholding decision and such interesting variables as race or living place but due to the limited range of a function of this exploratory research, these interesting factors are not taken into consideration. Needless to say, there are plenty of not mentioned factors that determine the level of stockholding.Of course, the governments are actuate to encourage investment level of households to make stock markets more efficient. There are some great examples how particular countries managed to increase the level of household stockholding over time. However, the complexity of the factors that lead to higher efficiency in each country are hard to determine and need further analysis to determine what works for each country particularly. Unfortunately, not all factors can be stabilized by the government. The global financial crisis of 2007-2008 showed that trust crisis in stock markets can not be handled so easily.Therefore, the only way to ensure sustainable stockholding growth is to adjust the system itself and add measures that could protect stockholders and decrease the possibility of such recessions. 4. REFERENCES 1. James P. Dow, jr. , Age, investing horizon and asset allocation, 2008 2. 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