Karina T. Agarwal
Though many view influential investors in the stock market and ordinary individuals as separate, they are intertwined. Income inequality and the stock market have been growing for quite some time. Now, many people are on the “financial edge” due to the pandemic, and, in reality, the individual Covid-19 “stimulus” money is quickly running out. For several years, low interest rates, set by the Federal Reserve, have been a significant factor driving up stock prices. Furthermore, equities have benefited from the levels of government bonds. As more money pursues shares, demand propels prices as well as returns on investment.
The market can be used as an equalizer to combat income inequality. In this new environment, it has become more accessible to own and trade stocks. Many platforms have switched to “no fees,” not charging individuals to buy and sell stocks. Moreover, these same platforms have begun to offer “stock slices” to make expensive stocks more affordable. According to recent surveys conducted by Gallup, despite these changes, only 55% of Americans own stocks. These positions are held as either individual stocks or through a mutual fund or even a retirement account.
During these past few months, the stock market has surged, and the S&P 500 has tripled in value. Tech shares posted the strongest performance in the S&P 500. Additionally, the tech-heavy Nasdaq Composite rose at a staggering rate. The expansion of these tech stocks came ahead of a series of earnings reports from some of the U.S. stock market’s largest companies. However, almost half of the county has missed out and has not benefited from this surge in stock prices.
Investing allows individuals to multiply their wealth at a faster rate than simply saving it. This is further enhanced by compound interest’s power – the interest you earn on your money added to the interest it has already accrued. Currently, the top savings accounts have offered rates just below 1.1%, while the S&P has produced average annual returns of approximately 10%. It is important to remember that the stock market does not represent the entire economy.
However, investing is an important method that can be used to improve one’s economic situation. This is why it is significant to note that the market and income inequality appear to behave in a correlated fashion over a long-term horizon. In the past fifty years, income inequality and the stock market have risen sharply. Nela Richardson, an investment strategist for Edward Jones, commented, “There is a disconnect between Wall Street and Main Street, and we would like overtime for that to narrow.” She also mentioned that it is crucial for people to begin investing, even with small amounts, to reap the same benefits over time when the market goes up.
Benjamin Blau, a finance professor at Utah State University, observed that increased market liquidity, where investors feel like they can buy and sell rather effortlessly, has been positively correlated with lessened inequality. In a liquid stock market, Blau conveyed that investors are more likely to provide capital to firms because they feel like they can easily get out of the investment. In turn, this reduces the costs of raising capital from investors by making fundraising simpler and faster. This benefits the bottom line, and it results in wage growth.
Experts have recommended that Americans keep an emergency fund covering at least three to six months’ worth of expenses. With any leftover savings, individuals can begin making small investments in the stock market to build up their wealth and gradually increase that amount. Therefore, it is prudent to look at investing in stocks and other broader investments that keep in line with achieving one’s financial goals.
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