Citadele Bank’s financial asset management experts offer their answer to this question, which has already been asked several times recently in regards to the possible sale of a [small] stake in state-owned companies on the stock exchange.
Result of surveys among Baltic residents show that only 7% of people in Latvia invest in the stock market, whereas in Estonia this number goes up to 16%. What are the main reasons for Latvian residents’ reluctance to engage in the stock market and why do people in Estonia seem more financially literate in this regard?
Latvian households’ financial assets are more often kept on their accounts.
Only recently, with rates going up, residents who use the opportunities offered by term deposits have become active. People in Latvia still have relatively low interest for financial products liked to financial markets – investment funds, accumulative life insurance, 3rd pension pillar, investments in company shares and bonds or government savings bonds.
While only approximately 14% of Latvian households invest in these financial instruments, in Estonia this number reaches 20%, whereas in western Europe even more people invest their money into similar investment options. Even in the seemingly conservative Germany residents invest around 40% of their private finances (70% in Sweden).
Residents recognise local companies on the stock exchange
One of the main reasons why Estonian residents are more active on the stock market is because local state companies’ shares are available. Even residents who do not have in-depth knowledge about financial markets have basic knowledge how the largest local companies operate. This serves to increase interest –
if a person invests in a local business, it is usually discussed with friends and acquaintances.
This exchange of information cultivates an interest in the stock market. Success stories of local businesses serve as a catalyst for residents to look broader – towards the global stock market. Estonian residents have successfully invested locally, and now they are interested in Latvian companies’ initial public offerings (IPO).
History lessons and reform aftertaste
Money reforms, from Soviet roubles to euro, as well as bankruptcies among banks in the 90s and recent early 2000s, have formed our collective understanding of the financial system. Unfortunately, it has also cultivated people’s distrust of it and financial markets in general. As a result of this,
Latvian residents’ “appetite for risk” is very low.
One confirmation of this is the portrait of an average 3rd level pension participant in Latvia – the majority want to save their funds using balanced pension funds in which shares make up a small portion of the portfolio.
Level of financial literacy and welfare
Unfortunately, Latvia has a lower welfare level than Estonia and Lithuania. Neighbours have higher average wages and more free finances to divert towards various saving activities. Additionally, in Latvia there is a very large imbalance of deposits – approximately 80% of financial assets are owned by 20% of households. This proportion is healthier in neighbouring countries.
Education and knowledge of the structure of the financial market go hand in hand with the overall level of financial literacy in the country. It would not be right to demand a large risk appetite from the older generation, as the school system’s offer in terms of explaining economic processes has been weak.
Younger people are in a more advantageous position – they are able to quickly develop their knowledge and skills using information available on the internet. Of course there are negatives to this, because it is young people who tend to have tragic experience with cryptocurrencies or other in-the-moment popular investment options. But this negative experience still gives them a lesson to learn and be more careful with their investments.
When can people start investing?
In order to make investments in a disciplined manner, you must first take care of the arrangement of your financial space. This means that the resident should be provided with a financial security pillow before starting the investment – that is, quickly available funds amounting to at least three months of expenses.
In some cases, when evaluating your financial health and the sustainability of your income stream, you can start investing in parallel with building an airbag. This can be done if the amount of three-month expenses can be accrued during the year from the monthly free funds, Citadele Bank experts say.
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