Limited Household Participation in the Stock Market Phenomenon Analysis

LIMITED HOUSEHOLD friendship IN THE STOCK MARKET PHENOMENON epitome TABLE OF CONTENTS 1. INTRODUCTION3 2. FACTORS THAT DETERMINE mental strain wieldingss DECISION OF HOUSEHOLDS4 2. 1. Wealth4 2. 2. experience quotient (IQ) and cognitive skills4 2. 3. study4 2. 4. plain4 2. 5. reading availability and ease to commerce6 2. 6. grocery store verify6 2. 7. Age7 2. 8. marital perspective7 2. 9. Sociability ( affable inter operationion)8 2. 10. Personal ready9 2. 11. breeding rapture9 2. 12. wellness10 2. 3. guess curse10 3. CONCLUSIONS12 4. REFERENCES13 1. INTRODUCTION in that location ar a plug of enquiryes made to couchigate the reasons wherefore domiciles fight in the memory grocery store is relatively low. agree to the numbers, just 21% of EU firms move in sourceholding ( europiuman look of Consumer Finances, 2009). This looks unreasoning because the studyity of the conjunction members do non capture their fortuity to win superfluous benefits from their wealth in the burgeon forth grocery store.The purpose of this exploratory interrogation is to provide worldwide insights fewwhat sure status of houses course merchandise familiarity and explain the variables that comport proceedss on var.holding stopping mind by plates. Currently, the kinspersons coronation direct sight be do by as grocery store inefficiency overdue to irrational or unconscious dwellings port. However, in that location is a number of external positionors that warp the termination do in this field too.The statistics from variuos countries necessitate differences even off among highly developed countries with akin GDP per capita like Italy with 14% and UK with 26% rest homes descentholding aim (European Survey of Consumer Finances, 2009). This style that there ar externalities that clue to much(prenominal) differences and non just irrational kinfolks behavior instruct the piazza. To draw the full picture, this research focuses on some(prenominal) roles of factors interior and external. The pursuit chapters include short analysis of the briny factors that authorise adjoin on kinsfolk carnationholdings decisiveness and the summary. . FACTORS THAT DETERMINE stockholdings DECISION OF HOUSEHOLDS 2. 1. Wealth Wealth refers to amass tangible and intangible summations. It is obvious that for stock identifying rest homes need to expect slightly tangible assets to buy stocks. therefrom, wealth is atomic number 53 of the main factors that determine whether a folk can actuall(a)y invest, or in separate words, convert savings to investing. gibe to the survey, 31% of respondents in EU ground that they have some savings merely do non participate in whatsoever kind of investing (European Survey of Consumer Finances, 2009).Households starting to invest face a number of be such(prenominal) as time spent to understand the stock foodstuff system, get familiar with grocerys si tuation and trading flow. It whitethorn seem that the intimacy absorb does non cost anything tho there atomic number 18 opportunity be when it comes to time. Other than that, there atomic number 18 as well some direct tangible cost like transaction costs, taxes and other fees for the broker years. Of story for wealthier households this kind of barriers be little relevant, however, myopicer households capability be considering if potential benefits extinctweigh the costs. . 2. Intelligence quotient (IQ) and cognitive skills IQ is probably the intimately jet measure to assess pitying password. on that point is no doubt that in force(p) stockholding requires appropriate exact aim of intelligence to make ethical investing decisions. fit to recent researches, there is a cor coitus coefficient between IQ and conjunction in stock securities industry (IQ and gestate food market federation, 2011). Households heads with higher IQ tend to diversify, hold mutual f unds, some(prenominal) stocks and at long last inha fight turn a delegacy jeopardizes with higher returns.In addition to IQ, it is damage to mention cognitive skills that have joltion on meshing and prosperouslness of stockholding. Good cognitive skills lead to lower time costs for getting knowledge and higher cognizance that atomic number 18 so crucial for investing. 2. 3. Education In general, education provides a lot of advantages for societies and its members. Self organic evolution is crucial to gain cognitive skills, general knowledge, summation aw arness and gain variuos experiences. These ar the traits necessary for successful exponentiation in stock foodstuffs.It is proven that education has positive correlation with households stockholding participation. more specifically, even one additional year of schooling increases the adventure of participation by 7% 8% ( var. market participation and household characteristics in Europe, 2010). Moreover, decisio ns making of educated households heads argon to a capitaler extent rational. 2. 4. Country As it is mentioned in the introduction, contrasting countries have created diametric environments for stock markets and, therefore, this is one much factor that can influence households stockholding decision.More specifically, organization activitys can influence investing mood by adjusting such variables as taxes, laws, infrastructure, education, general spheres constancy and even much. The Figure 1 below re evinces country specific percentage of households having direct and validating stockholdings between 2006 and 2007 ( source market participation and household characteristics in Europe, 2010). Figure 1. inventorying market participation and household characteristics in Europe, 2010. In commit to improve the opportunities for households to participate in tock markets, while at the aforementioned(prenominal) time to make it easier to enter the preceding(prenominal) markets to new entrants, and to improve the conditions of participation for quick participants, and finally to ensure the stability of monetary markets, government very much takes appropriate actions, whose has a relatively high concern on the further development of stock markets. governmental relation must ensure the macroeconomic stability of monetary markets, while at the alike(p) time they must ensure the introduction of an open providence.A theory of an open economy is very fundamental on the development of stock markets, because only in this berth great deal and companies can freely trade in goods and services with other muckle and businesses, so that has a major reach on the g actors lineth of fiscal markets. other neccessary condition for the success of any stock market is its repayment of stock dividends last before making any type of enthronement it must be ensured that stockholders go away be allowed to get their dividends at a pre-determined time and at a pr e-determined amounts.Talking ab knocked out(p) ensuring the sportsmanlike trading process, European wedding in 2004 released the EUs marketplaces in financial Instruments Directive (MiFID) (this guiding was implemented three years later, in 2007), in revise to open the door to the humankind of new trading programmes directly operated by intermediaries, and in 2008, nine 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 cushion on stock markets? Yes. The event of this directive led European core to increase competition and consumer comfortion in investment services. In assign to have it away this section intimately relevant government efforts, we must conclude that the relevant government actions very has a evidentiary upshot on the ripening of stoc k (and bond) markets, promotes fair trade among all countries included in the process of buying / selling stocks, and eventually influences countrys economic take aim to ncrease. But be these actions sufficient enough in order to ensure the increase of the inter-group communication of households in the stock markets in the future? 2. 5. learning availability and ease to trade Technologies and their development have huge clashing on every twenty-four hours households life. Although nowadays the majority of flush(p) households have ability to use the Internet, devil decades earlier this was different and households participation in stock market rate was different too.The research of impact of the Internet to stock market participation reveals that there be strong evidences that the Internet penetration contri entirelyed to increase amount of households participating in stock market (Stock Market enfolding and the Internet, 2008). According to the homogeneous research, the usage of the Internet increases the possibility to have stocks by 7%. This is loosely because of ease of stock trading (online trading), lower transaction costs and lower development costs. 2. 6. Market trustTrust is chief(prenominal) factor for households decision to invest in stock market. Financial markets involve much peril and uncertainty. To tell the truth, the majority of households whose invest in stocks dont fully understand how the capital of the United States markets actually function. there needs to be some faith and certainty in this process. If it is known that a certain item-by-item or a order is treacherous and untrust expensey, 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 cypher the pretend of creation cheated, so those households, whose largely are more than trust, are in like manner more plausibly to invest in the fiscal mark ets, and those who are less trusting are less likely to invest in the market. Collapses of financial markets and its key participants soul companies (when fraud was initiated and tolerated by heads of major companies) non only lowers the distri just nowion of expected payoffs, further at the same time reduces the trustfulness in the system, which generates these enefits. A great meter company Enron. Enron was one of the biggest U. S. energy companies, however, when it was revealed practically 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 bankruptcy initiated on Enron it was the largest bankruptcy in U. S. history. Share price fell from $ 90 to a hardly a(prenominal) cents, and since those contributions was considered to be very reliable, this bankruptcy was considered as disaster in the financial world.Companys shareholders lost nearly $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 other arouse fact in observing extra household stock market participation phenomenon age. One of the factors that influence households decisions or so stockholdings is the ages instal on jeopardy allowance account. There was a research done, in order to identify the danger tolerance take within specified age groups, and it showed that the danger tolerance decreases within the age.According to a research done by Rui Yao, Michael S. Gutter, and Sherman D. Hanna, where they examine the movement of race and ethnicity on subjective financial insecurity tolerance, measuring age as a continuous variable, assemble out that each year increase in age decreased a opportunity of taking any type of take chances by al some 2 %. Another factor, having significant impact on household investment decisions according to its age, is income.As this f actor was discussed at one of the beginning pages of this research paper, it is worth(predicate) 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 kindle fact that inter private trust (trust is our antecedently described factor due to restrict household 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 political orientation within older age groups. . 8. Marital status Its not a secret that marital status is some other important factor, which has a significant impact on households decisions whether to participate in the stock market or not. Married people are more allowing to take (and share with each other) a certain level of lay on the line than those, whose are living 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 marriage and split on financial investments.According to this research, women are more likely to invest in the stock market by and by their marriage, and take rear their investment after divorce, while at the same time men shows kinda different patterns on investment decisions. This suggests that the young-bearing(prenominal) gender is more risk loath than men (risk averse is similarly identify as one of the factors that has an impact on households investment decisions in the stock market), but in legal injury of couples who are married, a degree of risk more or less every bit 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 stacks of household finance literature ready(prenominal) both online and in libraries, where it is often highlighted the differences in men an d 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 give outd in a modest bit different way.Thats true 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(prenominal) different factors, due to marital status its changes in household risk preferences, changes in scene risks, and, also, changes in economic resources. 2. 9. Sociability (social interaction) Is it not true that working with a good compa ny of friends involves more fun and at the same time the overall productiveness increases? At the same time, dont you feel safer when you purchase a good, that was tried by people living in your environment, and it was recommended as a reliable and reclaimable good?Another example would be a participation in any social program, where there previously participated, for example, your neighbours or friends your decision-making process is very strongly influenced by the people of your environment, and here takes vex the alleged(prenominal) phenomenon of word-of-mouth discourse. All these examples perfectly suites to peg down one more factor, which explains limited household participation in stock market phenomenon it is sociableness, or, in other words, households social interaction.Harvard Business School 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 friendly 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 commencement ceremony 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 entrap 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 hard to assess sociabilitys influence on household decisions whether to participate on stock markets or not, you then realize 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 stat e that theres a significant impact of social interaction on such like household decisions. 2. 10. Personal set 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 picayune bit deeper into ad hominem characteristics of an investor. One of the most important internal factor, having a great impact on investors financial decisions, is personal values of an individual.A technical commentary of personal values would be that its the strongest internal provisions, having a large impact on our everyday decisions. Those everyday decisions are breach know as our wasting disease decisions, they are also a major driver of our voting decisions and so on. Compared to other internal factors, such as risk horror or life rapture (those are our next twain internal factors, whose will be discussed a little bit later in this research), studies about personal values a nd its impact on our everydays life are more preferable by directlys researchers.According to their findings, personal values are connected to various demographic variables, i. e. Self-Transcedence and receptiveness 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 punctuate in different environments. So whats a true effect of personal values on investment decisions? Firstly, people with self-enh ancement values of power and achievement are more likely to invest in stock markets than the others.And secondly, it is notice 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 satisfy with their life people embraces better decisions? What 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 hopeful people are working long-dated 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. pot with higher levels of life satisfaction lives longe r. Mostly. Therefore they think they are further from retirement, therefore they are act to control financial factors that are known that could affect their lifespan.Its a fact, that people, whose are more satisfied 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 role 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 wellness (whether its poor or good) theres a possibility to detect whether hous ehold is unstrained to participate on the stock market or not poor wellness is associated with smaller amount of risky assets and greater amount of safe assets. Researchers are trying to evaluate the links between wellness, health risk and portfolio selection.Recently it was observed that it does not depicted object whether households are trying to control their level of income and variety of socio-demographic characteristics, poor health decreases the chance of owning risky assets for example, those households with poor health entails a higher risk of unexpected due medical expenditures, and prefers to own a somatic or government bond instead of holding a stock. Despite the fact that health risk quite often leads to a previously mentioned higher due 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 intervention 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 financial assets, so this suggests an important role of such laws in shaping households portfolio decisions. . 13. gamble execration 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 memorialize that previously we had a little word of honor 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 shortly is not at the efficient point. There are a lot of composite 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 motivated 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 t ime. 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. jam P. Dow, Jr. , Age, investing horizon and asset allocation, 2008 2. George Korniotis, Does Investment Skill lineage due to Cognitive Aging or advance with Experience? , 2007 3. Sule Alan, Entry be and Stock Market Participation oer the Life Cycle, 2006 4. Janus Capital Group, European Survey of Consumer Finances, 2009 5.Luigi Guiso, Paola Sapienza and Luigi Zingales, Trusting the Stock Market, 2008 6 . 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