(Rough draft) The Rift Between Wall Street and Main Street

During the heat of the Coronavirus pandemic, the United States economy suffered. In April of 2020, the national unemployment rates skyrocketed to 14.7%, totalling over 20 million jobs lost. This daunting statistic had not been seen since the Great Depression. While the majority of Americans found themselves in debt, unable to pay rent, and left in uncertainty about whether they have enough money to buy essentials, the stock market flourished. At the end of 2020, even though the Coronavirus pandemic was still prevalent, the stock market averaged a 65% rise since its bottom in March and finished 14% higher since the start of 2020. If millions of Americans lost their jobs, who is benefitting from these massive gains? The answer lies in the hands of the wealthy individuals on Wall Street. So while the pandemic left the majority of Americans not knowing where their next paycheck would come from, the wealthiest Americans continued to grow their wealth, deepening the income gap in our country. One factor of the increasing gap in income stems from America’s trend of inequitable access to financial and stock market literacy.

Financial and Stock Market Literacy: What Exactly is it and How Do the Wealthy Use it?:

Financial literacy is a widespread set of skills and knowledge that allows individuals to make informed and educated decisions about their finances, ranging from how to manage debt, save for retirement, manage their taxes, and invest in stocks. Many Americans possess a basic set of financial skills. However, a crucial distinction which separates America’s richest families and poorest individuals is stock market literacy- the knowledge on how to make proper and rewarding investments in the stock market. This pivotal difference is one of the many driving forces behind the inequitable distribution of America’s wealth. The wealthy families of America use stock market literacy and knowledge to make lucrative investments, which allows them to passively enjoy compounding returns on their initial investments. Especially during the recent stock market boom, those who obtain the stock market literacy to make the right investments, yield massive gains. The problem lies in the fact that the access to stock market literacy is limited and often unavailable for the lower and middle class. Since middle and lower class Americans lack access to stock market literacy, they miss out on the gains, while the literate wealthy families accumulate the majority of the returns from the stock market.

Currently, the unequal access of stock market literacy results in the lower and middle class individuals simply not investing in the stock market. In fact, the top 1 percent of wealthiest Americans own 52% of stocks, and the top 10 percent of wealthy Americans own 87 percent of stocks. This corresponds to distribution of America’s wealth: the top 10% of wealthiest Americans who own the majority of the stocks account for 76% of America’s wealth, and the bottom 50% of poorer Americans who own less than 1% of stocks make up barely 1% of America’s total wealth.

This astonishing and unequal distribution of stock market ownership stems from the inaccessibility of stock market literacy- the top 10% of wealthy Americans have access to financial resources and information whereas the bottom 50% lower and middle class do not. It is unfortunate that the lack of access to financial literacy is a prevalent factor that is forcing 61,400,000 families to share just 1% of America’s total wealth. In other words, the wealthy who obtain and apply their stock market literacy own most of America’s wealth, whereas the poorer families who do not have access to stock market knowledge do not invest, causing them to miss out on the stock market returns, and thus they are limited to a minor proportion of America’s wealth.

The Burden of Educational Institutions:

The unequal access to stock market literacy resources is a problem that policymakers need to put a higher priority on. In addition to the lack of access to stock market literacy itself, the very limited financial advice lower income families receive is often faulty and incorrect. Policymakers can alleviate this lack of accurate information about investing in stocks by adjusting and incorporating more programs into education institutions, thus giving quality investing advice accessible to families of any socioeconomic background. A study conducted by TeachForAmerica found that in 2018, a mere 3.6% of low income high schoolers were required to complete a financial literacy or investing course in order to graduate. This pitiful statistic shows that our current education system is not providing low income individuals the tools needed for financial success. It is ultimately up to policymakers to adjust our educational institutions to help fix the societal problem of unequal access to stock market literacy resources.

The positive effect of incorporating stock market literacy programs into our educational institutions has also been proven successful, giving a hint of an optimistic future. Dr. Melody Harvey, a poverty researcher at the University of Wisconsin-Madison, evaluated the long-term benefits of requiring financial literacy courses for high schoolers. Her research revealed that the high schoolers that received mandatory stock market investing and financial literacy courses made less riskier investment decisions, which led them to accumulate more wealth than a control group of high schoolers who did not receive financial or stock market literacy courses. Additionally, a study conducted by economics researchers at Dartmouth College found that attending an employer-sponsored retirement seminar on investment strategies and building passive income resulted in net worth increases by nearly 27% for individuals who were in the lowest income bracket and had not received a high school diploma.

These findings show that obtaining stock market literacy has an influence on an individual’s wealth, especially for those in lower-income brackets. The positive correlation is clear and prevalent regarding the more literate about the stock market individuals become, the more wealth they accumulate over time. Policymakers need to understand that implementing stock market literacy programs into our educational systems will allow lower income families to have the ability to access the knowledge about the stock market that the wealthy have been exploiting for decades. Access to stock market literacy should not be a privilege only enjoyed by those who can afford- it is contingent upon our policymakers to make financial literacy a fundamental right that is offered to people of all individuals through our educational institutions, regardless of their socioeconomic status.

However, even if education is reformed and access to stock market investing knowledge is equally dispersed, why are primarily lower to middle class individuals still not investing? What is preventing lower income people from investing? The answers to these questions include the simple physical wealth barrier, but are surprising more about the psychological and societal myth that has been groomed by America’s capitalist roots.

Debunking the Myth:

The limited access to investing in the stock market is an idea that is embedded into the roots of America’s capitalist society. This idea that only the wealthy can invest in stocks has created a stereotype of a typical investor. There is a tendency to believe that the investors who dominate Wall Street are large institutions, hedge fund managers, private equity firms, investment bankers, and generally wealthy individuals who have the money to invest. Although this stereotype is mostly true, it does not mean that investing is exclusive only to the wealthy. In fact, mostly anyone is eligible to invest in the stock market. It is this common myth that acts as the psychological barrier that intimidates and prevents the lower income families from building passive income through stock market investments. Providing equal access to stock market literacy resources is a major step to diversify the population of investors, but it is also important that we debunk this myth. By overcoming this barrier and myth, the riches of investing can be distributed more equally.

To help debunk the myth that Wall Street is a club exclusive to the wealthy, there has been a recent increase in the ways in which the average American can apply stock market literacy and invest in the stocks they choose. This trend shows an underlying theme of democratization and liberalization of the stock market. Services such as Robinhood, a commission-free investing application, gives any individual the opportunity to invest in stocks and mutual funds. Other recent activities mirror this trend, including the short squeeze of Gamestop’s stock performed by Reddit users or spreading free stock market literacy resources through social media platforms like Instagram and TikTok. Although the roots of capitalism unintentionally implies limited access to financial markets, services like Robinhood, Reddit, and other social media platforms are challenging the traditional norms of the stock market being limited to a small handful of banks and financial institutions. As more of these services are created, knowledge about proper investments are becoming easier for lower and middle class individuals to access, thus allowing the benefits of capitalism being more equally distributed to all. These novel methods of allowing any retail investor to own stocks combined with implementing more stock market literacy resources into our education systems could pave the way for a more evenly distribution of wealth among Americans.

Why the Amateur Retail Investors are a threat to Institutional Investors:

However, Wall Street’s stereotypical investors are wary and hesitant about this unconventional wave of democratizing stock market investing. Earlier this year, a group of individuals on a Reddit forum called WallStreetBets caused GameStop’s stock to rally, which resulted in investment management firms to lose big time. Hedge funds including Melvin Capital, Citadel, and Maplelane Capital totalled billions of dollars worth of losses. The Reddit followers used democratized forms of investing, especially applications like Robinhood, to fuel the short squeeze that made the institutional short sellers lose billions. During this chaos, Robinhood halted Reddit users and other casual retail investors to buy GameStop shares, which angered many Reddit and retail investors. The U.S. Securities and Exchange Commission intervened and now Robinhood is facing many class action lawsuits. In sum, the major losses incurred by the hedge funds and institutions on Wall Street was caused by the increased access to liberalized forms of investing. This uproar left Wall Streets’ traditional institutional investors wary and skeptical about the idea of allowing anyone to enter the stock market, and they want to keep the stock market an exclusive club.

Although America is far from providing equitable access to stock market literacy resources for all individuals, we are getting closer and closer. It is ultimately up to the policymakers to implement more programs to allow increased accessibility to stock market literacy programs, then it is up to the individuals on how to use the knowledge. Despite the myth of stocks being limited to the wealthy investors, we are in a revolutionary time in which retail investors are starting to increase their participation in the stock market. As time goes on, permitting equitable access to stock market literacy will eventually allow lower income individuals to grow their income using similar strategies as the wealthy.

I am a current undergraduate studying economics and statistics at Swarthmore College.