"A dull sermon will never gain the ear of an investor." President Zhang Yujun of the Shanghai Stock Exchange (SSE), an expert in securities theory also a sophisticated regulator, expressed his unique, thorough and systematic understanding of investor education.
Market condition relies on quality of investors
"As investor education is the foundation of capital market, we can never put too much emphasis on it." In the eyes of Zhang, it is the quality of investors that determines the condition of a market. The maturity of a market is subject to its investors' maturity, professionalism, rationality and risk awareness.
In recent year, thanks to the market growth, the individual enthusiasm for market participation has been much aroused, with a remarkable increase in newly-opened accounts and number of investors. However, looking back into the history, our investors and capital market are far from mature. Behind the excessive fluctuation on the A-share market is the inexperienced and immature market investment concept. Even some institutional investors acted shortsightedly in their trading.
Cases of irrationality and immaturity could also be found on the put warrant market at one time where a number of investors made themselves a cat's paw and suffered great losses. In addition, individual investors, particularly small individual investors, motivated by speculation through frequent transactions, lacked rational judgment on the intrinsic values of stocks and preferred ST stocks, small-cap stocks and stocks with high P/E ratios. The less investment experience the individual investors had, the higher risk they referred.
Investor education is closely related to the construction of qualified investor teams. "The future of China's capital market is in the hands of investors." From the point of view of Zhang, the current situation that quite a few investors are still not mature, rational and risk-sensitive enough and not fully prepared theoretically or psychologically calls for a further improvement in investor education.
Improve investor education from four aspects
How can we achieve a desired result from investor education? Zhang realized through daily practices that education can not be isolated.
A dull sermon will never gain the ear of an investor. Zhang proposed from a more comprehensive and systematic perspective that investor education requires integration of four aspects, namely integrating investor education with investor service, supervision and protection. To achieve the ultimate goal of fostering rational, mature, professional and risk-aware investors, training should be provided for investors, the whole industry should change its services for investors, the regulator should strengthen its supervision over investors and the judicial and administrative organs should improve their protection of investors.
As a market organizer and self-disciplinary regulator, the SSE, in line with the unified deployment of the China Securities Regulatory Commission and the overall development trend of the securities market, upholding the orientation of "integrating investor education with investor service, supervision and protection", made consistent efforts in 2009 to improve its investor education by putting emphasis on securities trading and combining investor education with system construction, frontline supervision, market innovation, industry self-discipline and investor complaint handling.
According to Zhang, investor supervision can be improved through classification of securities products, which is classified supervision over investors according to criterions including assets scale, knowledge and market participation. The SSE, a self-disciplinary organization responsible for frontline supervision over investors, will explore the classified investor management system through innovation and classification of securities varieties and businesses to realize a classified supervision in accordance with standards like investors' risk tolerance, investment ABCs and market experience. Furthermore, the SSE may introduce the investor qualification access system after taking China's situation into full consideration and making accurate analysis on investors' characteristics.
At the same time, the SSE will continue to strengthen its supervision over the investors' trading and intensify all penalty mechanisms. Apart from the existing means such as account surveillance and restriction, the "blacklist" system is also to be introduced as one of the restriction indicators for investor qualification accreditation. Besides, a market entry banning system will be set up, under which the investors, ineligible for investment due to serious law-breaking, will be prohibited from market entry.
Zhang pointed out that the current efforts of China in intensifying investor protection are also preconditions and guarantees for its capital market reform, opening-up and stable development. Investors' rights to know and rights of action should be protected by encouraging investors to safeguard their rights and interests through legal means while the supervision over other market participants against their infringement on investors' rights should be intensified. Effective investor rights and interests protection mechanism is crucial to the optimization of resources allocation, the prevention of financial risks, the economic growth and the healthy and stable securities market development.
"Right products for right buyers"
Zhang mentioned several times in his interview regarding investor education that "right products should be sold to right buyers". "Metaphorically speaking, Maotai Liquor is too good to be sold to three-year-olds. It is easy to find the truth in it." Zhang was quoted as saying.
As far as Zhang is concerned, investor education needs to be synchronized with product innovation. For instance, investors will be permitted to invest in the basic products like stocks and bonds as long as they are qualified for general requirements. But for investment in derivative and structured products, strict accreditation is necessary. Differential qualified investor systems should be established in the process of product innovation.
It is a really tough task for a rapidly growing emerging market to coordinate the influx of new investors and the timely introduction of new products, businesses and systems. After the smooth launch of the growth enterprise board, an array of reforming and innovation in the fields including margin trading and securities lending, stock index futures and agency share transfer system will be carried out. All of them need enthusiastic and rational participation of qualified investors.
In the past 2009, the SSE made great efforts in rules and systems innovation in a bid to cultivate qualified investor teams. On the one hand, the internal work guidelines were formulated to define the varieties of misfeasance by all market participants and the SSE's recognition procedures. On the other hand, the constitution of relevant rules on investor appropriateness management was kicked off to standardize the SSE members' risk tolerance evaluation towards their clients, thus helping individual investors improve their capability of risk awareness, prevention and control and guiding them to rationally participate in the securities transactions suitable to their risk tolerance.
In 2010, product innovation will still be one of the SSE's priorities. Under this circumstance, fostering large quantities of qualified investors for the innovation development on the capital market will be the key goal of investor education. Just like what Zhang said, "The ultimate goal of investor education is to cultivate rational, mature and qualified investors by improving their risk identification, independent decision-making and self-protection capabilities."
Zhang also holds that investor education is the common responsibility of the industry. Apart from the regulator, securities and fund companies should also reinforce their investor education. Our market's risk control competence and level largely depends on whether the intermediaries provide investors with professional services in an objective and just way. "There should be special investor education organs in the industry. Fund and securities companies, in especial, should enhance their customer services so as to sell right products to right investors."
Establish long-term mechanism
Investor education, a fundamental, long-term and systematic task, can not be accomplished in one move with immediate results. According to Zhang, investor education, aiming to cultivate qualified investors, should establish a long-term mechanism while strengthening market supervisions in an all-around manner. After all, the strict procedures for becoming qualified investors need a long-term mechanism to promote.
The SSE, long committed itself to investor education and protection, deepened the investor education through the "Six Ones" project last year. The "Six Ones" refers to one influential investor education website, one simulated securities trading platform with demonstration teaching function, one investor education forum with a wide coverage, one set of books for investor education with authoritative and intelligible contents, one set of rules and systems related to investor education and one group of qualified investors.
More specifically, in 2009, the SSE perfected the investor education work mechanism by making an investigation on the current situation of investors; set up the diversified communication channels of videos, websites and newspapers by launching the investor education program "Public Lecture on Securities"; introduced the simulated securities trading platform with integrated functions of securities knowledge learning, trading process demonstration and simulated trading and compiled the first book series for investor education; and laid a solid foundation for perfection of investor appropriateness management by formulating the internal guidelines of the "Misfeasance Recognition Standards and Procedures".
Thanks to years of mutual efforts, the system and relevant laws and regulations regarding investor education of China's securities market have been set up with rich contents and forms. However, it is generally agreed that the investor education evaluation, incentive and constraint mechanisms should be perfected and the initiative and enthusiasm of securities trading organizations in investor education should be boosted in the days to come in a bid to improve the quality and effectiveness of investor education.
Zhang noted that the SSE would integrate investor education resources and clarify all market participants' responsibilities in investor education to form the cohesion to expand the coverage and influence of investor education. Furthermore, the SSE would highlight the public nature of investor education by richening its modes while improving the professionalism of investor education to enhance its pertinence, effectiveness and diversity.
