Changes in Stock Ownership by race/Hispanic Status, 1998-2004

Article excerpt

In 2004, 57% of White households directly and/or indirectly owned stocks, compared to less than 26% of Black households and 19% of Hispanic households. Counting both direct and indirect stock ownership, the stock ownership rate of Blacks doubled between 1992 and 2001 and the Hispanic rate was 2.5 times as high in 2001 as in 1992. However, minority stock ownership rates decreased substantially between 2001 and 2004, while White stock ownership rates remained about the same. This paper uses the 1998, 2001, and 2004 Surveys of Consumer Finances to analyze factors related to stock investment ownership rates over the 1998-2004 period. Based on a logistic regression model, Black households had the same predicted stock ownership rates in 1998 and 2001 as White households that were otherwise similar in terms of income, net worth, risk tolerance, and other characteristics, but in 2004 Black households had significantly lower predicted stock ownership rates than White households. Hispanic households had lower predicted stock ownership rates than White households in all three survey years, but the predicted difference was much smaller in 2001 than in 1998 and 2004. Implications for financial education are discussed.

Black and Hispanic households have much lower net worth than White households, and the disparities have not decreased much during the past 20 years. The lower risk tolerance of minority households and the lower likelihood for middle and upper income minority households to invest in stocks and other high return investments, might contribute to the lack of progress in narrowing the net worth gaps. In 2004, the ratios of median and mean net worth for non-Hispanic White households to the corresponding levels for minority households were higher than the same ratios in 1995 (Bucks, Kennickell, & Moore, 2006), indicating no improvement in the relative position of minority households over that time period.

The lower stock ownership rates of Black and Hispanic households are due partly to their lower average income levels. Based on multivariate analyses, Gutter, Fox and Montalto (1999) and Coleman (2003) suggested that Black households with income and other characteristics comparable to average White households might have similar investment patterns. However, between 1995 and 2001, while stock ownership rates by minority households grew much more rapidly than for non-Hispanic White households (Aizcorbe, Kennickell, & Moore, 2003; Kennickell, Starr-McCluer, & Sunden,1997; Kennickell, Starr-McCluer, & Surette, 2000) rates for minority households dropped substantially by 2004. In contrast, ownership rates for non-Hispanic White households actually increased slightly between 2001 and 2004 (Bucks, Kennickell, & Moore, 2006).

The objective of this study is to analyze causes of the recent drop in minority stock ownership rates. Understanding the change in trends is important because stock investments are superior to other financial investments for long-term investing. All households with long-term investing goals should have stock investments or other high return investments such as investment real estate or investments in businesses, and if minority households do not have such investments, the wealth gap could increase despite improvements in education and income.


Stocks Versus Other Risky Investments

All households with long-term investment goals should have some stock investments (Hanna & Chen, 1997). In terms of investments easily chosen by average workers through individual retirement accounts or employer provided defined contribution plans, stocks represent a good choice for long-term investing. Over 90% of individual retirement accounts funds are in financial assets (Investment Company Institute, 2006). Publicly traded Real Estate Investment Trusts (REITS) have a total value just over 2% of the total market capitalization of all U.S. stocks (National Association of Real Estate Investment Trusts, 2006; New York Stock Exchange, 2007). …