LIMITED HOUSEHOLD PARTICIPATION IN THE STOCK MARKET PHENOMENON ANALYSIS
TABLE OF CONTENTS
2. FACTORS THAT DETERMINE STOCKHOLDING DECISION OF HOUSEHOLDS
2.2. Intelligence quotient (IQ) and cognitive skills
2.5. Information availability and ease to trade
2.6. Market trust
2.8. Marital status
2.9. Sociability (social interaction)
2.10. Personal values
2.11. Life satisfaction
2.13. Risk aversion
There are a lot of researches made to investigate the reasons why households participation in the stock market is relatively low. According to the numbers, only 21% of EU households participate in stockholding (European Survey of Consumer Finances, 2009). This looks irrational because the majority of the society members do not capture their chance to win additional benefits from their wealth in the stock market.
The purpose of this exploratory research is to provide general insights about current status of households stock market participation and explain the variables that have effects on stockholding decision by households. Currently, the households investment level can be treated as market inefficiency due to irrational or unconscious households behavior. However, there is a number of external factors that influence the decision making in this field too.
The statistics from variuos countries imply differences even among highly developed countries with similar GDP per capita like Italy with 14% and UK with 26% households stockholding level (European Survey of Consumer Finances, 2009). This means that there are externalities that lead to such differences and not just irrational households behavior determine the situation. To draw the full picture, this research focuses on both types of factors – internal and external. The following chapters include short analysis of the main factors that have impact on household stockholding decision and the summary.
2. FACTORS THAT DETERMINE STOCKHOLDING DECISION OF HOUSEHOLDS 2.1. Wealth
Wealth refers to accumulated tangible and intangible assets. It is obvious that for stock investing households need to have some tangible assets to buy stocks. Therefore, wealth is one of the main factors that determine whether a household can actually invest, or in other words, convert savings to investment. According to the survey, 31% of respondents in EU state that they have some savings but do not participate in any kind of investing (European Survey of Consumer Finances, 2009).
Households starting to invest face a number of costs such as time spent to understand the stock market system, get familiar with markets situation and trading flow. It may seem that the knowledge gain does not cost anything but there are opportunity costs when it comes to time. Other than that, there are also some direct tangible costs like transaction costs, taxes and other fees for the brokerage. Of course for wealthier households this kind of barriers are less relevant, however, poorer households might be considering if possible benefits outweigh the costs. 2.2. Intelligence quotient (IQ) and cognitive skills
IQ is probably the most common measure to assess human intelligence. There is no doubt that beneficial stockholding requires appropriate level of intelligence to make good investing decisions. According to recent researches, there is a correlation between IQ and participation in stock market (IQ and Stock Market Participation, 2011). Households’ heads with higher IQ tend to diversify, hold mutual funds, more stocks and eventually bear lower risks with higher returns.
In addition to IQ, it is worth to mention cognitive skills that have impact on participation and successfullness of stockholding. Good cognitive skills lead to lower time costs for getting knowledge and higher awareness that are so crucial for...
References: 1. James P. Dow, Jr., “Age, investing horizon and asset allocation”, 2008
3. Sule Alan, “Entry Costs and Stock Market Participation Over the Life Cycle”, 2006
5. Luigi Guiso, Paola Sapienza and Luigi Zingales, “Trusting the Stock Market”, 2008
7. Mark Grinblatt, Matti Keloharju Juhani Linnainmaa, “IQ and Stock Market Participation”, 2011
9. Elina Laakso, “Stock market participation and household characteristics in Europe”, 2010
11. Jeffrey R. Brown, Zoran Ivković, Paul A. Smith, Scott Weisbenner, „Neighbors Matter:Causal Community Effects and Stock Market Participation“, 2006
13. Kaustia, M., Torstila, S. „Stock market aversion? Political preferences and stock market participation.“, 2010
15. George Korniotis, „Does Investment Skill Decline due to Cognitive Aging or Improve with Experience?“, 2007
17. Edwards R.D., „Health Risk and Portfolio Choice“, 2005
19. Christiansen C., Rangvid J., Joensen J. S., “Fiction or Fact: Systematic Gender Differences in Financial Investments?”, 2010
21. Sule Alan, „Entry Costs and Stock Market Participation Over the Life Cycle“, 2006
23. Rui Yao, Deanna L. Sharpe, Feifei Wang, „Decomposing the age effect on risk tolerance“, 2010
Please join StudyMode to read the full document