The number of retail investors in BM&F Bovespa(BVMF:BVMF3)has decreased over the last 4 years. In 2014, 500,000 Brazilians invested in the stock market - only 0.3% of the Brazilian population and 11% of total financial trading, which is much lower than the global average.
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Here are five reasons why.
1. Most Brazilians do not know what the stock market is
It is not clear for many Brazilians that a share is a small piece of a real company, so people prefer to invest in something tangible, like real estate. In a recent research study, when asked why they do not invest in the stock market, 43% of respondents claimed financial ignorance and 12% thought that stocks were for rich people. In 2008, BVMF launched an educational campaign targeting five million investors. Although the first year was promising, helped no doubt by a huge number of IPOs, the overall performance was disappointing and only 10% of the goal was reached.
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2. Consumption behavior
Even after currency stabilization, Brazilians are still afraid of inflation. Hence, they tend to spend their wages as soon as they receive them. Also, Brazils recent growth has basically been financed by credit stimulation policies, which brought an upgrade in purchasing power and encouraged people to buy cars, air conditioners, smartphones and travels. After having more money, people preferred to fulfill consumption desires instead of increase savings.
3. Low disposable income
High taxes and expensive prices reduce the purshasing power and consequently the investment capacity of Brazilians. Energy, food, clothes and electronic goods are more expensive than in many other countries. As a consequence of poor financial planning (which comes also from items 1 and 2 above), many families depend on credit cards and hot money and paying high interest rates. This becomes a vicious cycle, reducing even more the income disposability and thus the investment rate.
4. High interest rate and few companies
Brazil`s government bonds have provided good returns with low risk. Interest rates have been kept at high levels as a tool of inflation control, creating a comfort zone for investors. Nowadays, the fixed-income yield is about 7% per year, with rising perspectives in the short term due to persistent inflation.
Still, several companies left the public market and are no longer listed in Bovespa.
5. Bad apples created a bad taste for the stock market
Eike Batista, a former titleholder of Brazil's richest man, used to appear in popular TV Shows showing off his cars, boats and luxury home. He would invite people to acquire stocks of his companies. He said that he would make them rich. I would like to invite people to invest with me and get rich from the dividends of my companies. But his businesses were involved a high execution risk. All his companies collapsed in 2014 and his fortune dropped from an estimated $34 Billion to under $1 Billion.
Another case that destroyed Brazilians confidence and shocked small investors is the recent Petrobras(PBR)corruption scandal. Ten years ago, as a government incentive, workers had the opportunity to convert part of their retirement taxes, called FGTS, into shares of the Oil company. After the investigation showed billions of dollars in losses due to corruption and a refusal of financial statements by auditors of PricewaterhouseCoopers, the market value of Petrobras fell down more than 60%.
These five factors combine to explain why many Brazilian people don't see the incentive to invest. There is no other way to bring the investors back than through better education of financial knowledge and more transparency.
The article 5 Reasons Why Brazilians Are Not Investing in Stocks originally appeared on Fool.com.
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