Stock Markets Win the Masses
BOSTON — Capitalists are spreading like dandelions.
In the United States and around the world more and more people are buying corporate stock.
Ownership of shares in most industrial nations and in many emerging markets is "increasing rapidly," says Lorenzo Gallai, chief economist at the International Federation of Stock Exchanges (FIBV) in Paris.
The US leads the pack.
The last Federal Reserve study of wealth in 1995 found that 40 percent of the 100 million American households own shares directly or indirectly through mutual funds, trust accounts, or pension accounts. That's up from 31 percent in 1989.
At least 50 million Americans own shares directly, says New York Stock Exchange (NYSE) president Richard Grasso. That number has doubled since 1975. Another 110 million own shares indirectly.
People in other nations are buying more stock as well, encouraged in part by new freedom to invest and rising prices. "Nobody wants to be left behind," says economist William Freund at Pace University in New York City, referring to the 90 percent rise in stock prices in the past three years.
Reflecting the interest, the Nasdaq stock market, sometimes called the over-the-counter market, gets about 10 million to 12 million "hits" per day on its Internet Web site.
Stock investing, says Dean Furbish, the chief economist for that market, has become "cool."
As a result, more Americans view the economy in a capitalist manner. "They think more of returns to capital," says James Poterba, an economist at Harvard University in Cambridge, Mass.
Meanwhile Russia, which had nearly zero stock investors four years ago, has an estimated 500,000 today.
China, which opened its first formal stock market in 1993, has perhaps 10 million stockholders now, says Peter Wall, an expert at the International Finance Corp. (IFC) in Washington.
Among India's 900 million people, perhaps 30 million own stocks, many through a lively mutual-fund industry.
Share ownership in Australia soared this year to 5.5 million, or 40.4 percent of all adults. That proportion is up 6.4 percent in the past nine months. One key reason was the sale of one-third of Telstra, the government-owned telecommunications company. Encouraged by a low price and an allocation system, nearly 2 million Australians took advantage of the partial privatization to buy shares. The government announced March 15 it would sell the remaining two-thirds of the $40 billion company, using the proceeds to retire 40 percent of the national debt.
In Norway, 14.4 percent of adults owned stock directly or indirectly in 1994; today that figure is 17 percent.
Ownership of stock has also grown in Canada (to 37 percent) and Britain (26 percent).
German share ownership rose when a chunk of its state telephone company, Deutsche Telekom, was sold to the public with a tax advantage for buyers of the stock. But only 6 percent of adults own stock. Germans, inclined to be cautious, usually prefer to invest in bonds.
In France, 9.2 million people owned stock in 1996, or 15 percent of all adults.
Spreading stock ownership is "a good thing," Mr. Gallai says. It facilitates the financing of businesses through the sale of stock to the public.
"For companies, it is more sound to finance their growth with capital-raising from markets than from financing through the banking system," he maintains.
The FIBV has a membership of 51 exchanges around the world. It has 16 affiliate exchanges waiting to become members as soon as they fulfill the requirements, and another 30 "corresponding" exchanges in emerging markets.
Besides bull markets, other trends have stimulated stock ownership:
* The end of the cold war.
Capitalism won. Now former communist nations are encouraging the formation of stock markets as a way of raising capital for development.
The IFC, an affiliate of the World Bank, has been helping nations establish the legal and institutional framework for stock ownership. It has, for example, invested in a central depository system in Moscow - a place where stocks are held for convenience in trading.
* Privatization. Many governments in Europe, former communist nations, and developing countries have decided to sell state-owned enterprises. Since 1990, at least $370 billion in state assets have been sold to the public. The deals are usually structured to gain a wide ownership of the shares.
For example, Britain privatized many state-owned companies under the leadership of its former Conservative Party prime minister, Margaret Thatcher.
* Long-term returns. Gradually, it has sunk into public thought, especially in the US, that stocks have given a better return over time than bonds and many other investments. Even older people, who are usually advised to stay away from volatile investments, are deciding that stocks are a good buy, says James Cochrane, chief economist of the NYSE.
* Baby boomers. This numerous generation of Americans has reached an age when its members are thinking of financial plans for retirement. Many are not receiving traditional corporate pensions and are seeking alternative retirement-saving vehicles such as Individual Retirement Accounts and 401-k plans.
"More people are thinking of the stock market in terms of its importance to their retirement well-being," says Mr. Poterba, the economist.
* Declining inflation. On average, inflation has not been this low in most of the world for 20 or 30 years. As a result, interest rates have fallen. This makes stocks, despite their higher risk, more attractive.
In Brazil, which has often suffered hyperinflation, investors have put $30 billion into savings vehicles such as mutual funds.
"It is a good start," says the IFC's Mr. Wall.
With severe inflation mastered, several Latin American nations are encouraging individual pension plans, which often invest in stocks. Wall reckons there are 500,000 individuals with such plans in Chile, 2 million in Mexico, and 1 million in Peru.
* Marketing. Mutual funds and other institutions are spending unprecedented amounts in the US and some other nations promoting the purchase of their stock-investment vehicles. Some major US mutual-fund management groups are going abroad seeking foreign investors. Fidelity, the largest US fund group, has operations in Argentina and Japan. Morgan Stanley is in India.
Investing in mutual funds makes good sense for those people who lack the time, access to information, and experience to invest directly in stocks, says James Grant, a professor of finance at the Simmons Graduate School of Management in Boston. "It is very difficult for individual investors to get one-up on Wall Street," he warns. "Individual stock selection can be quite risky."
In the US, more investors are choosing professional managers for their stock choices. Money invested in stocks by institutions that manage $100 million or more rose to 51 percent of the total value of all stocks at the end of 1996.