The Rift Between Wall Street and Main Street: Stock Market Literacy

During the heat of the devastating Coronavirus pandemic, America’s economy was at its worst state since the 1930s. The national unemployment rates skyrocketed to highs of 14.7%, which accumulated over 20 million jobs lost. A statistic this scary 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 food and water, the stock market flourished. At the end of the depressing year of 2020, even though the Coronavirus pandemic was still prevalent and continuing to ravage American families, 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 and the economy suffered, who was benefiting from these massive gains? Why is the stock market not accurately representing the economic health of our country during these unprecedented times? The answer lies in the hands of the wealthy and money-savvy investors of Wall Street. While the pandemic left the majority of Americans unsure and fearful about their futures, the richest Americans continued to grow their wealth, thus widening the rift between Wall Street and Main Street. One factor causing the increasing gap in income- unequal 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. Financial literacy includes a wide range of skills, from how to manage debt, save enough money for retirement, manage their taxes, and invest in stocks. It is the basket of basic money management skills that most Americans possess. However, a notable and crucial distinction between America’s richest families and the 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, allowing them to enjoy returns on their investments in the stocks they choose to buy. Especially during the recent stock market boom, those who have the stock market literacy to make the right investments, yielded 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 investing in 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% of wealthiest Americans own 52% of stocks, and the top 10% of wealthy Americans own around 90% 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 roughly 70% of America’s wealth, and the bottom 50% of poorest Americans who own less than 1% of stocks make up barely 2% of America’s total wealth.

This 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% do not. It is unfortunate that the lack of access to financial literacy is a prevalent factor that is forcing 61,400,000 American families to share merely 1.9% of America’s total wealth. In other words, the wealthy generations of families 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. This lack of knowledge causes the misinformed, lower class families to miss out on the stock market returns, and thus they are limited to a small sliver of America’s wealth.

The Burden of Educational Institutions

The unequal access to stock market literacy resources is a problem that policymakers need to prioritize. Also, it does not help that most lower income families receive information about investing from people with a small amount of stock market knowledge (and who likely had a bad experience with investing themselves). A survey conducted by Charles Schwab Research showed that the COVID-19 pandemic highlighted the need for financial literacy in our education systems, and now 63% of Americans want to prioritize financial and stock market literacy.

The increasing wealth gap is being noticed by many people and more Americans are demanding similar financial education that the wealthy receive. Policymakers can alleviate this lack of accurate information about investing in stocks by implementing more programs into education institutions, allowing quality investing advice to be accessible to families of any socioeconomic background. In fact, an experiment conducted by TeachForAmerica found that in 2018, only 3.9% 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 allocate more resources to educational institutions to help low income families have access to the same financial resources that higher income families have.

The positive effect of incorporating stock market literacy programs into public schools has also been proven successful and hint towards 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 who received mandatory stock market investing and financial literacy courses made safer investment decisions, which led them to accumulate more wealth than a 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 a positive impact on an individual’s wealth, especially for people in lower income brackets. The positive correlation is clear and prevalent that the more literate about the stock market individuals become, the more wealth they are able to accumulate over time. Policymakers need to understand that giving lower income families access to stock market literacy programs through our schools will allow them to build passive sources of income in addition to their typical job. As a result, the gains that the rich have been exploiting for decades will be more accessible to all. Access to stock market literacy should not be a privilege only enjoyed by those who can afford it. The decision to fix this problem rests on our policymakers’ shoulders by making stock market literacy a right that is offered to everyone through our schools.

However, even if our education systems are reformed and access to stock market investing knowledge is equally distributed, why are lower to middle class individuals still not investing? What is preventing lower income people from investing? Although the answers to these questions are primarily due to America’s large wealth gap, another important factor is about a societal myth that has been groomed by America’s capitalist roots.

Debunking the Myth

America’s capitalist society has created the myth that only the wealthy can invest in stocks. Additionally, this myth has created a stereotype of a typical investor. There is a lurking tendency for lower income people to believe that those who can gain money from investing in stocks are only the investors who dominate Wall Street. These include large financial institutions, hedge fund managers, private equity firms, investment bankers, and generally wealthy individuals who have a sufficient amount of 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 investing. Providing equal access to stock market literacy resources is a major step to equalize the population of investors, but it would also be a huge milestone if society debunks this myth. By overcoming this barrier, 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 want. This trend shows an underlying theme of democratization and liberalization of investing in the stock market. Services and other smartphone applications anyone can download such as Robinhood, a commission-free investing application, gives everybody the opportunity to invest in stocks and mutual funds. Other recent activities follow 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 capitalism unintentionally imposes limited access to financial markets, services like Robinhood, Reddit, and other social media platforms are slowly breaking down the myth and challenging the traditional norms of the stock market. Rather than being limited to a small handful of banks and financial institutions, everyday people now have the opportunity to invest. As more of these services are created, knowledge about proper investments are becoming easier for lower and middle class individuals to apply. These new methods of investment combined with implementing more stock market literacy resources into our education systems could help close the rift between Wall Street and Main Street.

Why the Amateur Investors are a Threat to Institutional Investors

However, Wall Street’s stereotypical white collar investors are hesitant about this unconventional wave of democratizing investing in the stock market. Earlier this year, a group of users on a Reddit forum called WallStreetBets caused GameStop’s stock to rally, which resulted in the hot-shot Wall Street investors to lose big time. Many well-known and respected hedge funds including Melvin Capital, Citadel, and Maplelane Capital incurred combined losses of billions of dollars. After the damage was done, a popular user on the WallStreetBets Reddit named Uwillmire page declared,

“Today’s actions by several brokers just show how desperate the hedge funds are getting. Hold with your immovable diamond hands for all that you hold dear and we will be breaking Wall Street TOGETHER while making gargantuan tendies in the end!”

These Reddit threads were made possible because of Robinhood and other democratized forms of investing. This uproar left Wall Streets’ traditional institutional investors skeptical about the idea of allowing anyone to enter the stock market, and now they want to keep the stock market an exclusive club.

The GameStop short squeeze gave the traditional titans of Wall Street a bitter taste of what the future of investing may look like if the trajectory of democratized investing continues. The established Wall Street investors are using their power to suppress this new wave of investing in order to prevent any potential future actions that may result in large losses of money, similar to the GameStop incident. As a result, this battle between average retail investors and the stereotypical institutional investors is an important fight that will be fought for many years but will determine the distribution of stocks and wealth in the future years.

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 apply the knowledge. Despite the myth of stocks being limited to the wealthy investors, we are in a revolutionary time in which average people 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.