Limited Household Participation in the Stock Market Phenomenon, Reasons Behind It and Determinants That Influence the Stockholding Decision

Topics: Household income in the United States, Stock market, Stock Pages: 10 (3822 words) Published: April 13, 2013
Topic actuality. In the vast moving economy, it is important to know why the household participation of stock markets is so limited, what factors affect this limited participation and what could be done to make the situation better. According to N.Luotonen (2009), if market participation would increase, nor only the people, who already invest, would benefit, but also those, who do not participate in stock markets. In reference of the research conducted, not participating in stock markets can evolve to loss of welfare – the annual consumption could be up to two percent bigger if the stock market participation would increase. And for the participants of stock markets it is crucial to expand the participation of stock markets. It could appear that more participants in the market would mean more competition and smaller returns on investments. But the truth is, that bigger market participation would increase shareholder protection (Giannetti, M. and Koskinen, Y., 2008) and it could be one of the solutions to the equity premium puzzl, which began from finding that it is needed to make the aversion of risk very high to make the premium on equity very large (Mankiw S., Zeldes N., 1991). So, in conclusion, it is important for everyone, no matter a participant or a non-participant of stock market to know what are the factors impacting participation and how could the participation of households in stock markets be increased. Problem. What are the factors influencing household participation in stock markets? How could the participation of private investors in stock markets be increased? Goals and tasks:

1. Analyze the literature associated with the topic about stock market participation and differentiate what are the factors influencing stock market participation. 2. Analyze, how these factors impact the decisions of private investors 3. Considering the factors influencing private investor decisions, suggest methods that could be used to increase household participation in stock markets. Methods of research. Analysis of the literature associated with the topic.


1.1. Social factors
According to N.Khozunzhina (2010), investing is a costly process for individuals, considering the time and money spent to gather and analyze the information about how the stock markets function. This is the opportunity cost of participation in stock markets. Research showed that there is a significant difference between well financially educated people and those who are not so well financially literate and the investments they make. So, the lack of information about investing, or, in other words, lack of financial education, is a barrier for private households to invest (Christiansen et al., 2008). Social interaction correlates with stock market participation as well. Social interaction as a factor which makes difference to stock market participation decisions is closely linked to financial education and knowledge of information. Word-to-mouth communication is a way of delivering information to each other. This way, just by people talking to each another, financial information is passed by. And according to E. Laasko (2010), communicating about financial matters with a friend or an acquaintance lowers psychological costs which may appear when consulting with professionals. As well, people may be more likely to participate in the stock market if they have many people around them who invest in stock markets. Another connection is seen between participation in stock markets and the wealth of households. H.Guo (2001) states that “stocks are highly concentrated in the hands of very wealthy households”. Figure 1:  Wealth distribution by type of asset in USA, 2010: investment assets

Source:  Domhoff (2012)
The bottom 90% of households own 19% of assets in stocks and mutual funds, while top 10% of households own the rest 81%...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Limited Household Participation in the Stock Market Phenomenon Analysis Essay
  • Limited household participation in the stock market phenomenon analysis Essay
  • Stock Market Essay
  • Stock Market Essay
  • Determinant of Indian Stock Market Essay
  • Awareness and Participation of Locals in the Stock Exchange Market Essay
  • Stock Market Essay

Become a StudyMode Member

Sign Up - It's Free