Facebook Inc (FB), Microsoft Corporation (MSFT): Is This What Killed the Middle Class?

According to the Federal Reserve, only 15% of the American middle class, defined as having income between $35,600 and $94,600, held stocks outside of a retirement account. That’s a small portion of the middle class that would benefit from grabbing shares in early-stage companies — that is, if those shares even ended up rising in value.

The data, taken from 1980 to 2011, reveals that small IPOs perform worse:

Source: Jay R. Ritter, University of Florida. Returns are market adjusted.

And the smaller the IPO, the worse performance it had over the next three years. On the other hand, only companies which reported sales above $500 million in the year prior to going public earned a positive average return. It seems the middle class would get burned if able to grab shares in these earlier stage companies.

No easy solution
While it would be nice to flip a switch and help fix inequality, as Kupor suggests would happen if the SEC reverted back to a fractional price system instead of the current decimal system, the data contradicts some aspects of that argument.

Focusing on decimalization ignores other broad changes in our economic culture, like the higher costs Sarbanes-Oxley levied on small public companies and the reduced need for outright capital to launch a massive business with today’s technology.

The lack of small IPOs has not robbed much of the middle class of wealth opportunities, as only 15% of the middle class invests in stocks outside of retirement accounts. And, because the average small IPO earns negative returns, the lack of small IPOs has, if anything, saved the middle class from destroying wealth.

The article Is This What Killed the Middle Class? originally appeared on Fool.com and is written by Dan Newman.

Fool contributor Dan Newman has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook and Microsoft.

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