Does the Average American Invest in the Stock Market?

By Lindsay Frankel
Inside Subprime: May 13, 2020

Investing in the stock market can be a great way to grow your money. If you deposited $1,000 in the average savings account, it would only be worth about $1,500 after 50 years. Investing that amount in an index fund with an average annualized return of 10 percent, on the other hand, would yield you more than $59,000 over the same period. And some stocks are even more lucrative; had you invested $1,000 in Amazon just ten years ago, you’d have more than $19,000 today. 

The problem is, many Americans aren’t able to save enough of their income for a rainy day fund, let alone set money aside that they won’t be able to access in the short term. Survey results show that anywhere from half to nearly three quarters of Americans are living paycheck to paycheck. 

Only about one third of households have taxable accounts outside of their retirement investments, and a Gallup poll revealed that 45 percent of Americans don’t have anything invested. A smaller share of Americans are investing now than before the Great Recession, especially among lower-income and younger households. 

The Demographics of Investing

Americans who have non-retirement investments are more likely to be male, white, college-educated, older, and have higher incomes than the general population. While 39 percent of men had non-retirement investments in 2018, only 25 percent of women did. And only 26 percent of African American households had non-retirement investments. 

Pew Charitable Trusts also found demographic differences when looking at the share of families holding any investments, including retirement accounts. 61 percent of white households had something invested, while only 31 percent of black households and 28 percent of Hispanic households did. White households also had significantly higher amounts invested on average. In addition, young people were less likely to have an investment account; 41 percent of households headed by someone under the age of 35 had money invested. 

The share of households with investments and the median holding increased with income:

Family IncomeShare of Households with InvestmentsMedian Holding
Less than $35,00019%$8,400
$100,000 and above88%$138,700

Why Don’t More Americans Invest?

While primary reasons varied among groups, a survey of 508 non-investors found that 55 percent of Americans don’t think they make enough money to invest, making that the most cited reason. Other reasons included:

  • Not wanting to invest (15 percent)
  • Not knowing how to invest (9 percent)
  • Fear of losing money (8 percent)
  • Not trusting the stock market (8 percent)
  • Not having the time (4 percent)

The survey also asked, “What would need to happen for you to begin investing?” Responses revealed that debt may be the main deterrent for many Americans; 43 percent said they would need to have less debt to begin investing, while 41 percent said they would need a bigger salary. 37 percent said they’d need more investing knowledge, 21 percent admitted they’d have to cut down on discretionary spending, and 18 percent said they’d require the help of a professional. 

Financial Literacy and Investing

Only 57 percent of Americans are financially literate, according to the S&P Global Financial Literacy Survey. For many Americans, financial knowledge may be a barrier to getting started with investing. After all, 37 percent of non-investors said they’d need to boost their investing knowledge in order to enter the market. 

Even among investors, the gaps in knowledge are “alarming,” according to FINRA. Respondents were only able to answer an average of 4.7 out of 10 multiple choice questions correctly. 46 percent of investors believe that past performance indicates future results, and less than 30 percent understand that investing in an index fund rather than a managed fund results in lower fees. While those with higher portfolio values performed slightly better on the quiz, those with more than $250,000 invested still could only answer 5.3 of the questions correctly on average. 

Investment Decisions

How do investors decide which stocks to purchase? They’re mostly making their decisions based on information from individual companies they’re considering investing in (64 percent), information from financial services companies (60 percent), advice from financial advisors (59 percent), or advice from friends, family members, and colleagues (40 percent). 

The Role of Financial Technology

Some fintech companies are reducing the barriers to entry into the stock market by providing investors with the opportunity to purchase fractional shares of stocks and bonds. This allows Americans who may not be able to afford traditional stocks to still grow their money. Some companies let you name your price for a fractional share, and others allow automated investing based on spending patterns. Some offer robo-advising, which provides an automated approach tailored to the individual, with lower fees than typical managed accounts. 

Resources for Investors

Not everyone has a financially knowledgeable friend or family member or can afford the support of a financial advisor. And many Americans have little to invest, which means they’ll have to make important decisions about how to allocate their money. Thankfully, there are a number of free online resources that individuals can use to boost their investing knowledge. 

You might even consider signing up for a free online course for more detailed information and guidance, such as this Financial Markets course offered by Yale University. 

The earlier you start investing, the more your money will grow. That means you’ll have more to sustain yourself during retirement and more to pass on to future generations. So don’t let fear or a lack of knowledge get in the way of your financial security. Learn the skills you need to make healthy decisions about budgeting, saving, and investing today.

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