Why Financial Literacy Is Necessary for Socio-Economic Equality
Finance has traditionally been a field reserved for the social elite. Generally, the image of an expensively dressed, middle-aged white man luxuriating in his Wall Street office is the first thing that comes to mind when imagining a career in finance. Black and Latino certified financial planners (CFPs) made up fewer than 4% of the professionals in the field, while women made up fewer than 20% of CFPs in the United States at the end of 2019, writes CNBC. However, the narrative within the financial industry is changing, and education-focused companies like People’s Capital, founded by students at Scripps and Williams Colleges, are becoming instrumental in that change. Increasing financial literacy and use of the stock market would benefit society by allowing those of all socio-economic classes to feel comfortable building wealth in more ways than daily work. Teaching financial literacy would change how people interact with money by encouraging saving and investing over immediate spending. In the long run, these actions will benefit future generations by instilling responsible financial practices and a future-thinking mindset about finances. It would also aid in changing the distinct socio-economic divisions in society, and make the opportunity of the “American Dream” accessible to many more individuals.
Despite recent efforts, the challenge of increasing financial accessibility is a complicated one. Not only should the field become more diversified, but finance, specifically financial markets, as a whole should become a tool for all to know how to use. In an industry traditionally reserved for the socio-economic elite, it’s essential that people learn to understand and utilize the high-quality educational material and stock recommendations that companies like these can provide. The lack of relevant education is the main barrier for those looking to learn about and partake in the financial world. Ordinary people need help from companies like these to become active in finance.
A key factor in promoting financial literacy is finding ways to inspire people to invest in the stock market. Rather than continuing to be restricted to the upper class, the stock market must become a tool used by those from all socio-economic backgrounds for both future planning and as another source of income. According to Gallop, about 55% of Americans are currently invested in the stock market, mutual funds, or retirement savings accounts, like a 401(k) or IRA. However, the percentage of people invested in individual stocks is significantly lower.
Individual stock ownership is directly connected to household income, level of education, race, and age. According to CNBC, in “2020, the percentages owning stock range from highs of 85% of adults with postgraduate education and 84% of those in households earning $100,000 or more to lows of 22% of those in households earning less than $40,000 and 28% of Hispanics.” While companies have started working to increase financial literacy, specifically among underrepresented populations in the individual stock trading market, it’s not an easy task. A concerted effort is needed to advance people’s financial understanding; the question is, what’s the best way to start?
In order to increase the financial literacy of the general public, educational content needs to be clear and simple, which is not something that most financial publications offer. A majority of published finance-related articles are complicated and geared towards those who have graduate degrees in the field. With their frequent use of obscure terminology and complicated models, it is hard to find financial educational and informational material that is actually accessible to all.
To address this issue, the first step should be to provide individuals with a “dictionary” of key financial terms. Once one understands the difference between the price/sale and price/earnings, how a dividend is related to profits, what book value is, and other basic financial concepts, their general understanding of how financial markets work and why companies are valued in specific ways will increase dramatically. Many financial publications run under the assumption that these terms and numbers are common knowledge, which is simply not the case. This assumption turns away curious individuals who have not been formally educated in finance by making the information confusing and complicated, and ultimately results in hindering the goal of general financial literacy instead of aiding in accomplishing it.
The second step is guidance on how and where to trade stocks. For someone who is not highly knowledgeable about brokerage accounts, banking, and finance, choosing the right bank is a daunting task. Until one has an account, financial markets remain inaccessible. The solution: simplify the process. Summarize the most user-friendly, “intuitive,” banks and give step-by-step instructions on how and where to sign up.
Once a brokerage account is created, financial markets become as accessible as one’s Instagram feed. Sign in, and you can immediately interact with the market. The question then becomes how to decide which companies to “follow.” The best way to make a choice is by offering a suggestion and analysis destination for traders of all levels. The goal should be to recommend companies that have strong financials, but might not be as commonly known, and established companies that have the potential to adapt and advance in the future.
Giving individuals the tools to break into wealth, change the situation of their family’s finances, and empower them to educate the future is the motivation behind this financial literacy movement. It is necessary to change the dynamic of the financial industry from one that is mostly controlled by the elites, into a field that reflects the diversity of the world in order to progress as a society.
Enter People’s Capital: a solution to the financial illiteracy epidemic. The team at People’s Capital “conducts in-depth research on both the industry and the company’s position in it. Specifically, for industries with a promising future and companies who will best capitalize on this future.” For instance, they responded to the discussion on whether or not buying stock in airplanes is currently wise with simply worded infographics on their social media. Using social media apps like Instagram, TikTok, and Facebook, the company increases the accessibility of information and reach to People’s Capital’s target audience of 18-35-year-olds—ones who tend to use those apps.
“Once we choose a company we analyze its fundamentals,” continued Thomas Dean and Luke Graupmann, co-founders. “If a company has promising growth and is financially solid, we conduct a technical analysis to make sure we recommend it at the right time to buy,” they noted.A company is considered to have promising growth potential if it is part of an expanding industry that is gaining adoption or increasing in presence. Financially, growth appears as increasing year over year earnings. While there is no one metric for being financially solid, a company is generally financially stable when it can pay its debts, cash is flowing through the business, and has positive revenue from selling its goods or services. Investing in companies with strong fundamentals tends to be less risky than other investments, but still yields the rewards that the stock market tends to provide: higher returns than bonds, savings accounts etc.
The most important part of this process is to make sure that people understand both the risks and rewards of their investments. According to Dean and Graupmann, People’s Capital does so by “taking all this information and boil it down into eight digestible bullet points—5 reasons to buy the stock, and 3 risks associated with the company—so you can invest with confidence.” Processes like these are essential to clarify how risky a potential investment is, which is important for full transparency. Individuals need to also perform a personal risk assessment depending on their financial situation. A strong investment opportunity for one might be too risky or too safe for another, there is no proven best strategy.
Ultimately, financial literacy is an educational gap that is hard to fill unless one pursues a career in finance. However, finance and financial markets should be a tool that everyone, no matter their demographics, can utilize. As a society that has access to information at our fingertips through the internet and financial literature, changing the narrative of the finance industry from an exclusive niche of society to a commonly understood and used instrument for success should be a goal that everyone pursues.
Shanie Roth is a freshman at Scripps College and Chief of Marketing and Design at People’s Capital. The opinions expressed in this article do not necessarily reflect those of her employer.