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posted on 24 November 2017

Invest In Stocks? Depends On Where You Live

from the St Louis Fed

Stock market participation varies widely by income, with higher-income families being more likely to own stocks. But what about by state? A recent article in The Regional Economist found that stock market participation varied across the country as well, even among households of similar incomes.

Senior Economist YiLi Chien and Senior Research Associate Paul Morris examined IRS individual income and tax data for 2014, the most recent year available.1 The initial finding was that the percent of households owning stocks indeed varied by state. The range of disparity was large: In Mississippi, only 10.5 percent of households were in the stock market, while 26.6 percent of households in Connecticut owned stocks.

Income Level and Stock Market Participation by State

“However, this is not the whole story," Chien and Morris wrote. “Even when controlling for household income level, the large variation in participation across states prevails."

The authors plotted participation rates for Connecticut, Mississippi and the U.S. as a whole across income levels. “The participation gap remains large for each group, indicating that household income level does not entirely lead to differences in participation rates."

For example, the participation gap between Connecticut and Mississippi was 14.2 percentage points for the income group from $100,000 to just under $200,000. (To view the gaps at each income level, see The Regional Economist article, “Household Participation in Stock Market Varies Widely by State.")

Participation Rates across the Country

Chien and Morris noted that this pattern wasn’t limited to just the gap between the states with the highest and lowest participation. They plotted stock market participation rates for each state for households making from $100,000 up to but not including $200,000.

They found that five states had participation rates below 32.5 percent, while two states had participation rates of 45 percent and higher. The low was Utah at 30.7 percent, and the high was Vermont at 47.5 percent. (To see the variance across the country, see The Regional Economist article, “Household Participation in Stock Market Varies Widely by State.")

“This finding suggests that there might be some regional factors that are affecting the stock market participation rates," the authors wrote.

Why Does Stock Market Participation Vary?

Chien and Morris noted that participation costs - namely, the direct costs of investing and the indirect costs of learning about the stock market - are a hard sell as a culprit. Direct costs should be nearly uniform across the country, given the widespread availability of online brokers. Also, households at similar income levels could be expected to have similar knowledge of the stock market.

The authors noted that exploring regional factors to explain the differences was beyond the scope of this particular article. They did note, however, that financial planning awareness could be a possible explanation. “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," they wrote.

Notes and References

1 The authors approximated the stock market participation rate as the ratio of the number of tax returns with dividend income to the number of total tax returns filed. They used tax info because of its availability at the state level, but acknowledged that their figures underestimate true participation rates as not all companies pay dividends each year and dividend incomes in retirement accounts are not taxable. Still, this downward bias would likely affect states uniformly, making comparisons between states possible.

Additional Resources

‚ÄčSource

https://www.stlouisfed.org/on-the-economy/2017/november/invest-stocks-depends-where-you-live

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

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