Stock Market: First-time Investors

Lord Sikka Excerpts

Monday 3rd February 2025 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I thank the noble Lord, Lord Lee of Trafford, for this debate and for his excellent opening speech. This debate comes on a day when stock markets are tumbling and hedge funds have bet billions on a market crash triggered by trade wars unleashed by US President Trump. These events further highlight the casino nature of stock markets, which can easily burn first-time investors. Woe betide any Government which encourage people to gamble on the stock market, especially if people incur losses.

Due to inequitable distribution of income and wealth, most people simply do not have the cash to gamble on the stock market. One recent survey suggested that 34% of adults either had no savings or had less than £1,000. Another reported that 66% of adults had average savings of less than £10,000, so buying and selling shares is not really a priority for most people, and they will inevitably look for safer investments.

A key requirement of risk management is to hold a diversified portfolio. That means holding securities that are negatively correlated—a correlation coefficient of minus one would be ideal, but nevertheless they have to be negatively correlated. However, that is not easy to achieve for first-time investors if they are directly investing. Institutions have lunch-table meetings with companies to extract information, but individual investors have no power to extract any information, and they cannot even analyse the publicly available information. The annual report of HSBC is over 400 pages long. I do not how many investors are going to pour over that to make any sense of it, even when this information is publicly available.

Before any Government encourage shareholding, they need to look at the impact of the shareholder model of corporate governance. Shareholders focus on the short term and have no loyalty to any business or community. Some time ago, the Telegraph reported that the average shareholding duration in the US was just 22 seconds. Can the UK really be that far behind? How would that stabilise investment and companies? Shareholders really want to resolve uncertainty as quickly as possible, and the way they do it is by demanding returns very quickly. Andy Haldane, one-time Bank of England economist, noted that in 1970 major UK companies paid out about £10 of each £100 of profits in dividends; by 2015, that amount had increased to between £60 and £70, and this was accompanied by a squeeze on labour and investment. Basically, the country’s corn seed was being destroyed.

Most corporate investment these days is funded by debt or retained earnings. Annual share buybacks exceed the IPOs. The net result is that the UK languishes near the bottom of the OECD league for investment in productive assets. Much of the daily churning of share transfer money is really transfer from A to B; hardly any of it goes directly into the productive assets of the company.

Therefore, I do not think that the Government should encourage first-time investors to gamble in the stock market without improving people’s disposable income and rethinking corporate governance and powers and the rights of all stakeholders, not just shareholders.