What is the wealth gap and how does it affect stock market investments?


Americans have become acutely aware of the stark divide between the ultra-wealthy and those with low-to-average income. The pandemic has only highlighted wealth disparities in the country. The Federal Reserve says that the richest 10% of American households own a whopping 89% of all US stocks, proving the wealth gap is widening. 

What’s the consequence of this stark difference in assets? We can see enormous growth in wealth and net worth for those who were already at the top before the pandemic. Whether talking about Jeff Bezos or a more discreet tycoon, some profited while others struggled.

TL;DR

  • The wealth gap refers to the widening disparity between the wealthiest and the least wealthy Americans. 
  • Often, race and gender play a role in the growing wealth gap in this country. Women and people of color hold much less wealth overall than white males. 
  • Data from the Federal Reserve recently revealed the richest 10% of Americans own 89% of US stocks on the market.
  • Although many more people are beginning to invest in stocks, studies show that the wealthiest within the population reap a greater percentage of the gains. 
  • Newer investors tend to think short-term, while bigger investors aim for long-term gains. 

Who owns stocks in the US today?

According to 2019 data from Pew Research Center, 35% of Americans owned stocks, bonds, or mutual funds outside of a traditional retirement account like a 401(k) or IRA. This number is likely higher following the acceleration of retail investing in 2020-2021. As of 2021, retail investing activity accounts for about 20% of all trades.

Partly thanks to online investment platforms that have made stock trading easier, millions more people have begun investing in the stock market. One popular app actually added more than 10 million new account holders over the past two years. A downside is that the average account size for that app is only around $4,500, much lower than the portfolio size of wealthy investors.

A new study by Public and Nonfiction Research found that 56% of people who embarked on investing over the past year are the first in their families to do so. Not only did their parents not have a stake in the market, but 60% of these new investors said their parents were financially insecure. This new wave of investing could bode well for the creation of greater wealth for a larger portion of the population. 

Here’s how U.S. stock holdings performed during the pandemic, according to the Federal Reserve:

  • The top 1% of households gained a total of $6.5 trillion in mutual funds and corporate equities.
  • The bottom 90% of households gained $1.2 trillion in investment value over the same period. 
  • The wealthiest 10% of households owned 89% of US stocks. This represents the highest share in history.

The stock market is crucial to overall wealth creation. At the same time, it’s also the biggest contributor to income inequality and the wealth gap. Stocks are the source of 70% of the wealth gained by the rich over the past 18 months. 

The value of stocks held by the wealthiest 10% made gains of 43% between January 2020 and June 2021. By contrast, the remaining 90% reaped lower returns on their investments, gaining 33% on their stock holdings over the same period.

A senior fellow at Urban-Brookings Tax Policy Center Steven Rosenthal told CNBC reporters, “The top 1% own a lot of stock, the rest of us own a little.” 

How does the wealth gap relate to income inequality?

The wealth gap is not completely synonymous with income inequality, but the two are certainly linked. Income inequality is the difference between income levels for various segments of a population. This corresponds with the wealth gap, which refers to the disparity in how much wealth people keep. 

The wealth gap can also be looked at from different lenses, like race and gender.

Ownership of financial assets such as stocks is even more unequal in the United States than simple income distribution. Income inequality in 2019 meant that the top 1% of households earned 14% of all individual income. 

In the stock market, the differences are starker. The top 1% controlled:

  • 38% of stock accounts’ value 
  • 18% of all residential real estate equity
  • 24% of all liquid cash in bank accounts
  • 51% of the value of accounts directly holding individual stocks

Pew Research from 2019 revealed that 68% of upper-income Americans had personal investments in the stock market, versus only 38% of middle-income earners and 14% of low-income Americans.

Black Americans felt the wealth gap even more. At 14% of the survey population, Black people “accounted for just 8 percent of 2019 income, 5 percent of the money in liquid assets, and 2 percent of Wall Street holdings,” according to the New York Times.

How the wealth gap appears in the cryptocurrency market

The cryptocurrency market is poised to be more diverse than the stock market. A recent survey published by NORC, a University of Chicago research group, showed a greater diversity of race, gender, and ethnicity among cryptocurrency investors (as compared to retail stock investors).

Here’s a quick glance at some stats showing the wealth gap may be narrowing in crypto markets:

  • 44% of crypto traders responding to the survey were non-white
  • 41% were women
  • 35% earned less than $60,000 per year

When comparing these figures to those who own stocks, the percentages are lower: 38% were women; 35% were non-whites, and 27% were those making under $60,000. 

Bottom line

We know the stock market doesn’t accurately reflect the whole nation’s economic health. But the growing gap in stock market holdings for different demographic groups illustrates just how important it is for more people to invest in stocks in order to have a chance at gaining wealth. 

The statistics surrounding investment growth can feel frustrating as they continue to reward the wealthiest at a lopsided rate compared to lower- and middle-income families. Still, there are signs of hope. 

Public’s research has shown that of this wave of new investors, 73% have encouraged a friend or family member to begin investing as well. Meanwhile, Public’s own demographic is 40% women and 45% people of color, which is much higher than the national average. Perhaps the tide of income inequality and the wealth gap is turning. 

Rachel Curry is Pennsylvania-based content writer and journalist talking all things finance. She likes to give meaning to numbers by humanizing them. You can connect with her on Twitter at @writingsofrach.

The above content provided and paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

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