Small and medium-sized investors should not speculate on A-shares unless necessary: a research and analysis of the big data of the Shanghai Stock Exchange since 2007

Executive Summary:

• 1

  China's stock market trading rules are becoming more and more unequal, the profits of individual investors are increasingly being squeezed and squeezed, and the investment returns between individual investors and institutional investors are getting worse than scissors, according to the last disclosure of the profit distribution of different investors by the Shanghai Stock Exchange, the difference in returns between the two is more than 46 times.

• 2

  Since 2007, the market value held by small retail investors with a capital of less than 100,000 has decreased by more than half compared with the peak, while institutional investors and head individual investors can make profits most of the time regardless of the ups and downs of the market, and the total market value they hold has increased by more than 10 times, and the polarization of the stock market has become more and more serious.

• 3

  As the dualistic structure of China's stock market is gradually solidified, and small and medium-sized retail investors are in an increasingly difficult situation, for white-collar workers and the middle class, it is imperative to invest cautiously to prevent the loss of personal assets due to force majeure when the basic problems and basic contradictions in the mainland securities industry have not been resolved.

China's stock market is undoubtedly the worst performer among the world's economic normals, even worse than Russia's long-term economic slump last year, and recently under strong international support. Elroy Dimson, Paul Marsh and others, professors at the Judge Business School of the University of Cambridge, have been tracking the world's major securities markets for a long time, and their results show that from 1900 to 2020, the general rate of return in the securities market of developed countries is more than 8%, that is, it can far exceed the rate of price inflation, which is an important way to increase the wealth income of residents.

(Average stock market returns in developed countries from 1900 to 2020)

For example, according to the statistics of Deutsche Bank, the income of German residents from financial assets reached about 474 billion euros last year (not necessarily all stocks, but the proportion of stocks is the largest), and the average person can get nearly 5,000 euros of financial asset income, which has become an important engine for the growth of private wealth.

The mainland securities market has only been established for more than 30 years, and its scale has only been formed for more than 20 years, so it is impossible to make a comparison with foreign countries in the same period, but judging from the situation in the past 20 years, it has not been able to reach the yield of more than 8 percent in developed countries and the average rate of return of 6.9 percent in emerging countries. Specifically, if the yield of the mainland stock market can reach 6.9%, it means that a family with 10,000 yuan of shares in 2014 has almost doubled to 19,500 yuan, and it is believed that 99.5% of Chinese investors cannot do it.

At the same time, the recession of the mainland stock market is structural, with a very small number of people making a lot of money, while the vast majority of investors have been losing money for a long time, and have always been the cows that feed the top investors, or are jokingly called leeks that are harvested at will. How miserable are small and medium-sized investors, how big their losses are, how high their investment risks are, and how unfair the mainland stock market system is, there has been a lack of detailed quantitative research, in general, this is a general feeling of everyone, fortunately, the most important stock market in the mainland - the Shanghai Stock Exchange publishes a statistical yearbook every year, which has a detailed disclosure of investor status and transaction data, this article is based on 16 yearbooks since 2007, and analyzes the above problems.

1. Retail investors with low educational qualifications, low age and few assets constitute the vast majority of investors in the A-share market

At the end of 2022, the mainland had a total of more than 4,638 shareholding accounts, of which only 124,900 were institutional investors and 46.26 million were individual investors, accounting for 99.73%. Among the individual investors, nearly 90 percent of the investors are small retail investors with a share capital of no more than 1 million, of which extremely weak investors with a share capital of less than 100,000 constitute the largest base of the mainland securities market, with 23.05 million households, accounting for nearly half of the country's securities investors; and investors with an account capital of more than 3 million, let's call them professional-level investors, only 1.46 million, accounting for only about 4 percent of the total number of shareholders.

Let's look at other characteristics of these retail investors: more than 37% of them are under the age of 30, more than 69% are under the age of 40, more than 48% have only received technical secondary school or high school education or below, and only 3.83% of investors have a master's degree or above. In short, these retail investors are characterized by small share capital, low age and low education, neither sufficient judgment ability, nor anti-risk ability, and even some people sell houses and take loans to speculate in stocks. In addition, the extremely imperfect system of the mainland's securities market has formed the characteristics of a large number of prey, a strong ability to convey interests (always hoping to turn the tables by luck and continue to increase investment), and extremely weak resistance, and it is a very good hunting ground.

Second, the securities market is becoming more and more unfair, the transaction volume and profit distribution are becoming more and more disproportionate, and the fate of individual investors is becoming more and more tragic

According to these extremely detailed information, small and medium-sized retail investors contribute the vast majority of transactions, while only a small share of the returns, and the return on investment is simply not comparable to that of institutional and professional investors. In 2017, individual investors contributed 82.01% of the trading volume, but only obtained less than 9% of the profit in the stock market (310.8 billion v.S. 3,453.5 billion), in contrast, institutional investors only used less than 18% of the trading volume to obtain more than 91% of the profit, and the difference between the two capital flow profits reached more than 46 times.

(The scissors gap between investment returns for individual investors and institutional investors is getting wider and wider)

In the year of loss, the loss rate of individual investors is much greater than that of professional investors. Taking 2016 as an example, the market value of individual investors' holdings was only 39.4% of that of corporate investors (5.66 trillion V.S. 14.34 trillion), while the loss was equivalent to 72% (709 billion V.S. 982 billion), and the capital loss rate was nearly twice that of institutional investors. Retail investors can be said to endure hardships first, enjoy happiness last, take risks to the maximum, and obtain the minimum returns, what is it if it is not a leek?

What's even more frightening is that in the long run, the proportion of market profits obtained by individual investors is getting lower and lower. According to the data since 2007, the contribution rate of individual investors' trading volume has always been around 80%-86%, but the proportion of profits has dropped from more than 50% in 2007 to 32% in 2012, 26% in 2014, and further less than 10% in 2017. The implication is that the profits left by the securities market for individual investors are getting less and less, the market makers are becoming more and more dominant, and small and medium-sized retail investors are becoming more and more in a state of running for others and making wedding dresses for others.

(The proportion of individual investors' profits continues to decline)

Third, small and medium-sized investors have more profits and losses, and small profits are not worth big losses, while professional institutions and leading individual investors have always been in a state of high returns and steady wins

We can find that in the 16 years from 2007 to 2022, the total market value of those held by weak retail investors with less than 100,000 shares has only risen for 7 years and fallen for 9 years, while professional investment institutions have only fallen for 3 years and risen for 13 years.

And small retail investors are always falling and rising, and the total amount is shrinking, while professional institutions, general legal persons and head individual investors are all falling and rising, and their assets are rising all the way. From 2008 to 2022, the total market value of the Shanghai Stock Exchange increased from more than 2.8 trillion yuan to more than 50 trillion yuan, an increase of more than 17 times, while the market value of individual investors shrank by nearly 50% (480 billion to 325.2 billion), and the market share fell from more than 15% to 0.7%. In the same period, the market value of the top individual investors has increased by more than 75 times, and the market value of professional institutions has increased by more than 11 times, and they have outperformed the average return of US stocks.

(The market value of small and medium-sized retail investors has shrunk, while the wealth of institutional investors and top individual investors has grown rapidly, table unit: RMB 100 million)

Even if the scope of individual investors is expanded to investors below 1 million, these people generally have more than 10 million family assets, belong to high-net-worth families, and are basically high-income people in first- and second-tier cities, and they still have not been able to make money in the stock market. In 2007, they had a market capitalization of more than 2.1 trillion, accounting for about 30% of the total market capitalization of the Shanghai Stock Exchange, while in 2022 their market capitalization was only 2.35 trillion, and the market share dropped to 5.08%. This shows that even the high-quality middle class – who are generally well-educated and have good judgment skills (which are generally guaranteed to make a profit when placed abroad) are very difficult to profit, which shows how irrational our market is and how unfriendly it is to investors.

And those institutional investors and top individual investors can still make profits even in the time of the stock market crash. Taking the study of the 2015 stock market crash by Xia Chun, chief economist of Hong Kong Fangde Financial Holdings, released yesterday by FT Chinese Network as an example, in a year and a half from July 2014 to December 2015, the most vulnerable groups with a share capital of less than 500,000 lost 250 billion yuan, and their assets were almost cut in half, and small and medium-sized investors with 500,000 to 3 million account assets lost 42 billion yuan, and the cumulative loss of the two was 292 billion yuan. The profit of professional institutions was 252.3 billion, the profit of general legal persons was 112.9 billion, and the profit of the best individual investors with more than 10 million securities assets was 254 billion.

It is the irrationality of the underlying investors, as well as the weak position of information and rights and interests, that supports the capital myth that the upper investors can still escape in the stock market crash, and also builds the foundation of the unequal distribution of interests.

Fourth, the dualistic structure of the mainland stock market is becoming more and more obvious, exacerbating market volatility and bringing about a series of economic and social problems

To sum up the above, the mainland stock market has increasingly formed a polarized trend: At one end of the current field are small shareholders with a capital of less than 41 million to 1 million, although they constitute the vast majority of investors and also contribute most of the trading volume, but they have taken away a very small amount of profits, and only a few lucky ones have achieved value preservation and appreciation; while at the other end are professional institutions, general legal persons, and high-quality individual investors with a capital of more than 10 million yuan, but they have taken the vast majority of the profits. And this trend of polarization is becoming more and more obvious, and the author will call it a dual institution in the capital market.

The emergence of this binary opposition structure has further exacerbated the volatility of the market. The large number of small and medium-sized investors generally lack confidence and security, and are too sensitive to the market and trade frequently (about 15 transactions per year for individual investors in the United States, compared to about 60 in China), which pushes up the market volatility. After 2007, the stock market crashes and stock indexes hit new lows repeatedly, which is a reflection of the solidification of this binary structure, just as a dualistic society with opposing classes will be full of political turmoil.

(Comparing the trend of the Shanghai Composite Index and the Dow Jones Index from 2009 to 2018, the Shanghai Composite Index is obviously full of violent fluctuations, while the Dow Jones Index has risen steadily)

These major stock market crashes have dealt a heavy blow to small and medium-sized retail investors. Among them, from 2007 to 2008, the stock market crash, the national individual investors lost 2.19 trillion yuan, with an average loss of more than 70,000 yuan; in 2011, the stock market crash, individual investors lost 875.9 billion yuan, with an average of nearly 30,000 yuan; in 2015, the market value of investors below 300,000 decreased from 1,300.5 billion yuan to 869 billion yuan, which directly led to a decrease of more than 300 yuan in the shareholding accounts of natural persons that year. The biggest decline has occurred since 2022, with the market value of stocks on the Shanghai Stock Exchange falling from about 53 trillion yuan at the peak to around 40 trillion today, and individual investors have lost nearly 4 trillion yuan based on the proportion of shares held by individual investors at 23%. Of course, this is only a reduction in the total market capitalization, and the overall trading loss should be much greater than this value.

In the past, when domestic labor and resources, foreign technology, capital and other factors of production were abundant and could continuously stimulate economic growth, this dualistic stock market was a relatively independent pool that did not affect the overall situation. However, with the gradual depletion of the above-mentioned factors of production, the role of the stock market in economic development and its economic vane significance are increasing, which increasingly affects the confidence of the business community and the people. At the same time, at a time when residents' fixed assets such as housing have depreciated sharply, daily incomes such as wages have generally shrunk, and the damage to middle and lower-class investors in the capital market cannot be changed, then it is really time for the middle class to collapse on a large scale.

We should realize that any kind of dualistic division and inequality in society is caused by serious defects in the system, and we hope that the government can fundamentally rectify the securities market, improve the rules, completely change the state of the black market and underworld casinos operated in the dark (Mr. Wu Jinglian's words), and protect the interests of small investors, which will contribute to common prosperity and realize the harmonious coexistence of wealth between different classes.

Finally, although the author is not an expert in the securities industry, he still reminds me from the perspective of macroeconomics: at least in the short term, small and medium-sized investors should not enter the stock market unless necessary, and their personal ability, capital and information will not be able to compete with an imperfect huge system after all.