Longitudinal studies can offer many advantages for researchers. One such benefit is identifying emerging patterns that would otherwise remain undetected under cross-sectional analysis; another advantage lies in having a greater understanding of cause-and-effect relationships.
Results show the predicted effects of traditional variables; however, latent factor analysis reveals that both sociability and cognitive abilities tend to load onto one factor simultaneously.
Socio-demographics
Income and wealth are traditionally the key indicators of stock market participation among households; their differences vary across countries and over time. Income and wealth account for much of the variation seen in previous studies regarding participation rates. Social network ties, religiosity, cognitive skills as well as network ties such as interpersonal trust are also significant predictors of participation; however these do not load onto the same latent factor like income and wealth do and may lose significance depending on certain subsamples; interpersonal trust loses significance among highly educated individuals with high wealth individuals than anticipated.
Other factors with an impactful effect on participation are both macro- and microshocks. A sudden increase in household financial wealth often increases participation. Meanwhile, technological innovations reduce transaction costs of investing. Windfall gains (such as winning the lottery or inheriting property) also have similar results; households experiencing job loss usually withdraw stocks in favor of safer assets.
Experience
The percentage of individuals holding stocks varies by country, but most individuals own stocks indirectly through mutual funds or IRAs. A substantial number of households own directly owned shares directly, however. Income levels tend to dictate participation; families at the lower terciles typically participate only modestly while those in higher quartiles invest considerably.
Studies have identified multiple factors as contributing to lower stock market participation, including retirement and job loss which cause household reallocation from risky assets to safer ones; economic crises also tend to decrease participation due to liquidity restrictions and an increase in income uncertainty.
Money attitudes and knowledge also play a large part in shaping participation. In this research study, money attitudes were utilized as a predictor of stock market participation with financial self-efficacy serving as a moderator. Our results indicate that money attitudes accurately predicted participation regardless of amount invested, with female participants more strongly associated with positive attitudes than their male counterparts.
Regulatory environment
The stock market is an essential source of wealth in the economy and an effective means for households to save. Yet its participation can vary widely among household groups; retirement, job loss, political unpredictability and economic crises all decrease participation rates in this arena, creating liquidity constraints that force households away from owning stocks in favor of safer assets – particularly low-income and less wealthy households who may find this risky investment more pressing.
Vissing-Jorgensen et al. (2011) used a natural experiment to assess how windfall gains affected households’ investment decisions, finding that windfall gains had positive effects by decreasing information costs and transaction costs.
Personal characteristics also play an influential role in stock market participation, including gender and education levels. Education levels influence an individual’s marginal propensity to consume – the amount of spending each additional dollar generates in an economy.
Market environment
Many families own financial stakes in stock markets either directly or through mutual funds, although this varies considerably across countries and income groups. According to research, factors related to local economic environments and individual characteristics (e.g. education, wealth, risk preferences etc) play a large role in driving participation; but numerous other influences also impact participation rates.
Cognitive abilities, sociability, and religiosity are among the variables to consider here. Frederick (2005) found that individuals with high Cognitive Reflection Test (CRT) scores tend to be less loss averse and more patient. Dohmen et al. found cognitive ability had an impactful role even after accounting for education levels, income levels and credit constraints.
Kong et al. (2018) find that windfall gains, such as lottery winnings or unexpected inheritance, increase households’ stock market participation by relieving liquidity constraints. Meanwhile events like retirement, job loss or political uncertainty reduce participation by prompting households to reallocate savings into safer assets; decreasing Keynesian multiplier effects in turn.
