In-depth analysis on the structure and changes of investors’ trading behaviors helps promote the reform in fundamental system of the capital market. Since 2007, SZSE has been engaged in a long-term tracking study in investor structure and behaviors. Based on the results of research, SZSE made ongoing verification, evaluation and optimization of trading rules, investor suitability management and other systems. According to 2012 statistics, there’s an overall improvement in market trading behaviors in view of the climbing rationality degree. However, mid- and small-cap retail investors are still vulnerable in the eco-sytem of the stock market.
Viewing from the changes of investor structure
First, the number of mid- and small-cap individual investors has significant increased. From 2010 to 2012, the accumulated number of accounts opened in the Shenzhen market increased from 76.25 million to 84.25 million, while the number of active accounts went up steadily from 19.38 million to 24.48 million. The year 2012 saw a lower account closing ratio per month in comparison to 2011. From 2007 to 2012, the percentage of free-float market capitalization held by individual investors decreased from 60.4% to 42.8%, but the percentage of their trading value fell relatively slower from 87.4% down to 85.6%. In general, in spite of the rising shareholding percentage of institutional investors, the proportion of individual investors will still remain high in China’s stock market in the near future, which is calling for an improvement in the trading structure.
Second, the investor structure of the ChiNext market has improved. In the ChiNext market, the percentage of free-float market capitalization holding by individual investors is getting smaller, despite of its relatively higher ratio in comparison to the main board and the SME board. From Q1 to Q4 in 2012, the percentage of free-float market capitalization holding by individual investors in the ChiNext market reduced from 71.3% to 63.4%. Individual investors in the ChiNext market tend to have higher risk tolerance, and the proportion of investors with more than two years of trading experience is increasing. The percentage of free-float market capitalization holding by institutional investors is on the rise. In short, the investor structure of the ChiNext tends toward an improvement and optimization.
Viewing from the changes of investor behaviors
First, the trading frequency of individual investors remains at a high level in general, which is revealed by the high turnover rate. Individual investors traded more frequently than institutional investors, and small-cap investors traded more frequently than large-cap investors. From 2009 to 2012, the capital turnover rates for individual investors were 8.99, 7.21, 6.35 and 6.9 respectively, while the rates for institutional investors were 3.83, 1.61, 1.41 and 1.42. Mid- and small-cap investors prefer holding and trading highly speculative stocks such as those with high P/E ratios, low-price stocks and ST stocks. The average shareholding period for individual investors was only 39.1 days, much shorter than the 190.3 days for institutional investors. Stocks with strong volatility and brisk trading were sought after by mid- and small-cap investors, which would lead to hype and speculation.
Second, investor trading behaviors improved with enhancing market rationality. From 2009 to 2012, the number of shareholding days for individual investors increased from 31.9 days to 39.1 days. Small-cap investors’ engagement tends to be matched with the risk structure of products. Data indicated that ChiNext is less attractive to individual investors in comparison with main board and SME board in general. For individual investors with relatively stronger risk tolerance, ChiNext is preferred in comparison to the main board. To some extent, the efforts on investor suitability management and relevant risk disclosure dropped the mid- and small-cap individual investors’ engagement in the ChiNext market.
What calls for our attention is that mid- and small-cap individual investors are still vulnerable in the ecological structure of stock market, which is revealed by their higher loss rate and lower return on investment. The smaller capital they have, the lower rate of return. Individual investors with capital less than CNY100, 000 showed the lowest return on investment.
Meanwhile, there’s a way to go in the aspects of diversification of institutions and differentiation of investment styles. Currently, the percentage of institutional shareholding is on the rise, and the coexistence of diverse organizations with distinctive investment styles has formed. However, the major institutions are still fund companies and ordinary institutions, which accounted for more than 90% in the market capitalization holding by institutional investors in 2012. The engagement of social security funds, insurance agencies and QFIIs was much lower in the Shenzhen market, accounting for 1.6%, 1.9% and 1.3% respectively in market capitalization holding by institutional investors in 2012. Some institutions have similar investment styles.
Generally speaking, in market infrastructure construction, efforts should focus on increasing the engagement of different institutional investors, effectively guiding investors’ investment behaviors, and enhancing the differentiation of investment style and products. SZSE will continue to deepen the analysis of investor structure and behaviors, keep up the exploration and innovation in market supervision and service to meet the diversified and differentiated demands of investors, especially mid- and small-cap investors, laying a better foundation for the full play of the multi-tiered capital market.
