We’ve all seen stats like these, haven’t we…?
- The middle classes own 8% of stocks, the wealthiest 20% own the other 92%, of which the wealthiest 1% own 40% of that (Source — inequality.org)
- 5.5% of households in the bottom income bracket in the US directly own stock compared to 47.5% of the top income bracket (Source — Statistical Abstract of the United States 2012)
- 10.7% of households in the bottom income bracket indirectly hold stocks in the form of retirement accounts compared to 89.6% in the top income bracket (Source — Statistical Abstract of the United States 2012)
- The probability of a white household owning shares is four times the probability of an African-American or Latino household in the US(Source — inequality.org)
We know it. The world is unfair.
There is massive inequality in the distribution of wealth. No-one would argue that. What you may not know, but probably would guess, is that the inequality of wealth can be directly linked to participation in the global equity market. When the FTSE or Dow Jones sees a record high, the people who own the shares are the ones who benefit. So when we celebrate an increase in stock prices, we’re celebrating the rich getting richer. Of course, when we see a financial crises and stock market falls, this impacts the wealthiest shareholders most too.
Why is stock market participation dominated by a small part of the population?
There are a few reasons that are regularly discussed and researched by academics all over the world. These include…
The rich can afford to pay for financial advice…
The stock market is complex. Buying and selling shares can be complex. It can be intimidating for anyone who hasn’t done it before and who doesn’t know where to start. And there’s the risk of losing all of the money you invest, if the business you invest in doesn’t have the big, bright future that you expect. So financial advice is a good solution for novice investors. Unfortunately, it comes at a high price. Literally. The cost of financial advice is growing and growing, even more so with the introduction of more and more regulation. Financial advice is often outside the price range of anyone but wealthy investors. Many financial advisors ask for a minimum value of assets before they’ll even talk to you. So this, in itself, biases participation in the stock market to the wealthy.
The rich are more likely to be financially-savvy, or know someone who is…
Before you think about financial advice, you need to have some understanding of the stock market, how it works and that you may even have a need for a financial advisor. Therefore financial education levels will significantly impact the probability of individuals participating in the stock market. Behavioural economists Harrison Hong, Jeffrey Kubik and Jeremy Stein also suggest that sociability and participation rates of communities have a significant impact on an individual’s decision to participate in the stock market. Their research indicates that individuals living in US states with higher than average stock market participation are 5% more likely to participate in the stock market themselves. So, if you live in a financially-savvy area, you’re more likely to invest.
The rich have more disposable income to invest with…
On a really simple level, in order to invest in the stock market, you need to have money to invest. With most global households living on moderate or low incomes, disposable income, when it’s available, is often spent on short term interests, such as food, holidays and the like, and not investments. Investing in the stock market is a long term game. Unless you genuinely think you can time the market, by buying in the lows and selling in the highs, most investors focus on time in the market, so you put your money away for years. Most global households can’t afford to do this. They need the money today and tomorrow.
Tax policies favour indirect shareholdings first
Even when a household does have disposable income, that they want to invest for the long term, direct shareholdings are often not the first port of call. The decision to have direct or indirect shareholdings is influenced by taxation. For instance, many countries incentivise individuals to save for their retirement in the form of a pension, and provide tax advantages for individuals that do so. Only once an individual has benefitted from the tax advantages available to them, will they consider direct shareholdings. But, of course, a pension is a longer term and more restricted investment vehicle than buying and selling shares.
Why can’t we democratise the global equity market?
Why can’t anyone can participate the global equity market?
From any location, any background, any salary level, any education level, any demographic…anyone.
Why can’t we make it as easy to invest as it is to buy things online?
Individuals should have access to a simple app, where they can invest as much or as little as they want, without the jargon. Investors should be able to buy & sell shares on their lunch breaks, on a hike, on the beach…
Why can’t we help individuals to better understand the risks so they’re better informed?
It’s not that tricky. There are three risks to investing…
1. You could lose your money…so don’t invest more than you can afford to lose
2. You could pick winners and losers…so don’t put all of your eggs in one basket — spread your investment across different businesses and do your research before you invest
3. You might need to wait to get your money back…as it might take time to sell shares, so plan well in advance before you need the money back
We believe we should, and we can, democratise the global equity market. What do you think?
Chainium has rebranded to Own. For more information about our brand change please read this medium post.
