Investor Financial Literacy and Confidence Work Together to Increase Stock Market Participation

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While research shows that people who have more financial knowledge invest their money at higher rates, those who also have greater confidence are more willing to make riskier investments, according to a study from the University of Michigan. .

Scheduled to be published in the November issue of the journal Economic Modeling, the paper used data from the 2019 Survey of Consumer Finances to explore the relationship between investors’ financial literacy and confidence to determine what had the most impact on investor behavior.

The study found that people with both high financial literacy and high confidence in themselves and the economy are more likely to invest in stocks rather than low-risk investments like bonds, thereby creating more diversified portfolios.

“Why stock market participation rates in the United States and around the world are really low enough has long been debated,” said Joanne Hsu, director of consumer research at the Institute. for Social from the University of Michigan. Research and one of the four authors of the article.

“Nearly half of American households do not directly own stocks. So we were trying to figure out how financial literacy plays into that? To what extent does investor confidence, whether it’s your own ability to manage your finances or your confidence in the economy, also play a role? »

Hsu says confidence in the economy is far more influential in investing in the stock market than in the bond market.

“And that makes sense because bonds are less risky than equities. Often you turn to the lower risk assets if you think the economy is not doing well,” she said. So was really encouraging to find a very sensible result for confidence.”

Hsu and his colleagues say working to increase investor confidence — both in their own investing abilities and in the economy as a whole — could lead to better economic health for families and individuals.

The study was conducted in collaboration with Andrej Cupák (National Bank of Slovakia and Bratislava University of Economics), Pirmin Fessler (Oesterreichische Nationalbank) and Piotr Paradowski (Luxembourg Income Study and Gdańsk University of Technology).

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