You may assume that stock market participation depends on your income and personal wealth—and it does—but it may surprise you that stock market participants also vary by state. According to an article in The Regional Economist , which reflects the most recent data on the subject, stock market participation varies across the country by rather startling percentages.
The article analyzed IRS individual income from 2014, the most recent data available at the time. Note that figures underestimate true stock market participant rates as “not all companies pay dividends each year and dividend income in retirement accounts are not taxable.” However, this would probably affect each state in the same way, making the comparisons still genuine.
The overall revelation is that in Mississippi, only 10.5% of all households are stock market participants. On the other end of the scale, 26.6% of households in Connecticut own stocks.
The resulting math concludes that the gap between Connecticut and Mississippi is 14.2 percentage points for the $100,000-up to $200,000 income group.
What makes this even more baffling is Mississippi’s low cost of living. People with high incomes in that state should have even more available funds to invest in stocks than high-income people in other states, especially Connecticut.
Another puzzlement is that any costs involved in stock market investment (maintenance fees and such) are pretty much uniform across the country, especially in the digital age when it’s possible to invest directly online. A huge market of affordable, convenient online brokers are available to everyone.
Breaking Down Participation
The study, conducted by the Federal Reserve Bank of St. Louis senior economist YiLi Chien and senior research associate Paul Morris, found that “even when controlling for household income level, the large variations in participation across states prevails.”
What this could mean: household income levels do not necessarily lead to differences in stock market participant rates.
Keeping with that income group, Chien and Morris found that five states had participation rates below 32.5%; only two states had participation rates of 45% and above.
The state with the lowest participation in that group was Utah at 30.7%. The highest participation was Vermont, at 47.5%.
CNN Money theorizes that Utah is less racially diverse than most states, has higher than average credit scores and offers a financial literacy course in high schools.
However, Utah investors tend to prefer real estate, and the state’s public companies are owned locally and have been bought out recently. Another theory is that Utah has the highest fertility rate in the country (2.29 children per couple), and that’s where their money is going instead of the stock market.
“A hundred thousand or $200,000 goes a little less far as discretionary income when you have four or five kids than when you have one or two kids,” Brighton Wealth Management president Alan Battles tells CNN Business.
Drilling down further, the study suggests that “there might be some regional factors that are affecting the stock market participation rates.”
We don’t want to get political, but CNN Business reports that, according to IRS tax data, stock market participant totals are three points less common in states that Trump won in the 2016 presidential election that those states that Hillary Clinton won.
Countrywide, who are the most enthusiastic stock market participants? You probably guessed it: the wealthiest Americans. In fact, 84% of all stocks owned by Americans belong to the wealthiest 10% of households, according to The New York Times.
This figure includes pension plans, 401(k)s, and individual retirement accounts (IRAs), as well as trust funds, mutual funds and college savings programs like 529 plans.
A Brief But Significant History of Stock Market Participants
Stock ownership first became popular among the middle class in the 1980s and 1990s, due mostly to the popularity of individual retirement accounts (IRAs). However, the financial downturns of 2001 and 2007 may have scared off many potential stock market participants from the middle-class.
Another possible roadblock to more active stock market participants, according to Chien and Morris, include the indirect costs of learning the ins and outs of the stock market. A possible solution to this roadblock could be proper financial planning.
The report theorizes: “If households have less exposure to the importance of financial planning, then they are less likely to spend time and effort on improving investment decisions regardless of participation costs.”
History shows that stocks are the way to go. From 1928 to 2016, the average annual stock return was about 8 percentage points higher than the return on three-month Treasury bills. If you invested $100 each in stocks and in Treasury bills in 1928, your yield in 2016 (88 years later), would be $329,000 for stocks and only $2,000 for Treasury bills.
More numbers shore up this theory: a 2016 study by Survey of Consumer Finances (SCF) economist Monique Morrissey shows that many American families have little or no retirement savings.
Observing this data, Chien and Morris find that, at their current jobs, only 27% and 33% of households have defined-benefit and defined-contribution plans, respectively. Only 8% of households had both plans at current jobs.
“The most recent SCF data show that not all employers offer pension plans to their employees and not everyone who has access chooses to participate,” they wrote .
Possible Causes of the Lack of Stock Market Participants
So then why so much reluctance to invest in the stock market? It could be more nurture than nature. Investing could be influenced by the surrounding community.
If people in a given area have less exposure to the importance of financial planning, they may be less likely to spend time and effort on learning those stock market ins and outs. The participation costs are not as much a determining factor.
Stock Market Participants By Age Group
A lack of stock market participation has generational as well as geographical roots. Over 82% of Millennials say their investment decisions are influenced by the Great Recession, when a total of $14 trillion in wealth perished.
Many of these people saw 50% or more of their parents or older siblings’ wealth wiped out.
According to Bankrate , Millennials favor cash over other investment opportunities. Other generations including Gen X, Baby Boomers, and the Silent Generation all prefer the stock market. But the stock market offers long-term potential for investors to grow their wealth, and millenials focused on cash savings could miss out on the potential returns.
How SoFi Can Help You Participate in Stocks
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