This is a question that has been debated for decades. There are many reasons why the stock market might not be good for middle-class people, but there are also many reasons why it can be beneficial. In this blog post, we will explore both sides of the argument and determine if investing in stocks is right for you!
Article Overview
Is the stock market good for middle-class people?
A stock market is a great place for people who have extra money lying around. But, unfortunately, most middle-class families don’t have that luxury, and if they do, they likely won’t put it into the stock market.
There are other options, such as an IRA or mutual funds, which can be used to invest in stocks, but those also require steady income. If you are reading this trying to decide whether or not the stock market is right for your middle-class family, it likely isn’t unless you have extra money that can be put into investments on a regular basis.
There are a few reasons why the Stock market might not be good for middle-class people.
Stocks are risky
Stocks are risky, and you can lose money buying them. Most people don’t have the extra cash to pay for a stock that suddenly crashes or declines significantly in value.
It’s not like most middle-class families could borrow some money and buy more stocks for averaging the purchase price. Plus, borrowing money to invest in the stock market will likely result in more debt than gain.
With most investments, you can earn some interest which will likely outpace inflation. Unfortunately, this is not the case with stocks if you have a few stocks undiversified in your portfolios. There is also no guarantee that even if you invest in stocks that you will make any money. It’s possible for your stock to go down in value over time.
Gains from Stocks are not Tax-free
Stocks are not tax-free investments. If you sell your stocks within one year, then it will be considered as a short-term capital gain. Short-term capital gains are taxed at the regular income tax rate.
But if you sell your stock after one year, then any profit you make from it will be considered as a long-term capital gain. If you make any capital gains over $40,000 as a single filer, you must pay a 15% capital gain tax.
According to Pew Research Center analysis of government data, about 52% of U.S. adults living in middle-class households have an income ranging from $48,500 to $145,500 a year in 2018. Another data from the United States census bureau says the average U.S. Median Household Income was about 67,521 in 2020.
In this situation, almost all middle-class American household income earners fall under the 12% to 22% federal income tax bracket.
Now think about short-term capital gains that can affect your income tax badly. For example, say you are married and filing jointly, you fall under the tax bracket of 12% with an earning of $80,000.
This year, if you make any capital gain or any dividend earning from the stock market over $1050, you will have to file income tax for a 22% bracket. And this will be applied to your total earnings, which will be increased by 10%.
Stocks are volatile
Volatile stocks might seem like an opportunity for some quick cash, but it’s usually short-term, and you can lose more than you gain through this strategy. When most people get wind of something new, they jump on it, thinking that there’s an opportunity for easy money. This is because most people don’t do the research to find out how volatility and risk to return ratio really works.
Stocks can be a quick vehicle for making money. But they should only be considered if you have the time and dedication to research companies and understand their potential to focus on long-term gains.
Sure, you might turn a quick profit on one or two stocks, but it’s usually short-term, and if you’re not careful, you could end up losing more than what you gained. Moreover, a volatile move to the downside could wipe all savings in a matter of time for a middle-class family.
Stocks are not very liquid
Stocks aren’t very liquid, so if your family suddenly needs cash, you can’t sell your stocks. Cash is the most liquid asset that exists, which is why people keep saying, “cash is king.” It can be converted into any other asset immediately with no loss in value and a very low transaction cost. Stocks aren’t like that.
Liquidity is the ease with which an asset can be bought or sold quickly without affecting its price too much. With the stock market, if you want to sell a share of AAPL or GOOG, then someone else must be willing to buy it at the current asking price. If no one is selling it for that price, then you can’t get out until someone changes their mind and comes down in price.
The problem with this is that in a recession the stock market tends to crash down. That’s because when people are scared, they don’t want to own stocks but instead go for cash or other less risky assets.
For middle-class people, stock ownership could bring a huge financial crisis with liquidity shortage in that situation. If the market crashes, middle-class investors typically don’t have much spare cash to bear their daily life expenditures.
If a person has a small amount of money saved, he should focus on less risky investments such as bonds; compared to stocks; bonds are more liquid.
Middle-class families already have plenty of risks
Middle-class families don’t want to take on more risk than they need in order to increase their income and build wealth. They already have plenty of risks in their life like college education, mortgage payments, household debt, children’s future, health insurance, etc. So the last thing they need to do is take on unnecessary risks.
You can’t predict what will happen in the future. The market may be good today, but in a month or two, the value of your asset may be back down to where it was before.
If your stocks go down, you don’t have an option of filing for bankruptcy so you can wipe out your debts and start over again. In fact, if you file for bankruptcy, you will lose all your stocks and possibly even your retirement savings.
During the 2008 financial crisis, many people lost a lot of money on their investments, and most of them were middle-class families with a high unemployment rate. So, it is not a good idea to invest in the stock market if you want to make your money safe and make sure that there is no risk of losing everything.
So how would people in the middle class increase their income and build wealth? The good news is that you don’t need to try hard ways like investing in stocks. Instead, you can follow some simple ways mentioned below, which you can quickly start from today:-
Cut Your Expenses
I know that this sounds very basic, but reducing expenses is the first step to take if you want to start saving money. Start by listing all of your monthly expenses from the smallest to the biggest one and ask yourself if you really need to pay for all of them.
For example, do you have a gym membership that’s going unused? Or maybe you have an extra cell phone line or two – it is better to cancel those and start saving.
Reduce your Debt
If you have any kind of credit card debt, avoid using them while paying off the balance. If you need to make a purchase, use your debit card or cash till you pay it off.
The other option is to put all extra money towards the debt until it’s gone, but this may take years, depending on how much money you can put toward it each month.
Build Your Emergency Fund
Setting aside some money for emergencies is very important, even if it’s only $100. This will give you peace of mind knowing that you can afford to deal with life’s little (or big) surprises without having to use your credit cards. And when the time comes that an emergency pops up, you can use your savings as a fixed deposit without having to worry about paying the money back.
Pay Yourself First
Just like you pay all of your monthly bills, you have to take care of yourself too. Set aside a certain amount each month for personal expenses so that when you need something new or want to treat yourself, you can do so without feeling guilty.
Make a Budget
Creating a monthly budget is essential for anyone who wants to save money, and it doesn’t have to be difficult at all. If you want to start saving, make sure that you know how much you bring in every month and exactly where your money goes.
Are stocks in middle-class retirement accounts tax-free?
No, most stocks are held in tax-advantaged retirement accounts, which defer taxation until withdrawal. Even people whose funds are held outside retirement accounts can find some solace in two other factors: first, they’re unlikely to sell all their stocks at once, and second, the increasing divergence between rich and poor means that fewer people will be paying taxes on investments.
Because many people hold their investments for a long time and in tax-advantaged accounts, such as 401(k)s and Roth IRAs, they can defer capital gains taxes until withdrawal.
Wealth in stocks has increased for the wealthiest
Since the early 1980s, however, the gap in income and wealth has widened between the wealthiest Americans and everyone else. A growing number of middle-income people are keeping their stock holdings outside of tax-advantaged accounts.
Looking ahead, it seems likely that more and more people will retire without significant wealth: The median retirement account balance among workers aged 55 to 64 is 84,714 (the most recent year with data), according to Bankrate.
On the one hand, increasing inequality in wealth distribution means that a smaller share of Americans will ever have capital-gains income.
The share of household wealth in stocks has increased for the wealthiest Americans, even as their overall share in national wealth has decreased. The price-to-earnings ratio — a common measure of how expensive stocks are — is near historical highs, and many investors think the current stock market value will either remain high or go higher.
As a result, “a smaller share of assets will be taxed each year,” said Saez. However, this isn’t necessarily a good thing for the American economy and economic growth since capital gains income isn’t as productive as income from wages and salaries.
Does the stock market affect the average person?
The stock market is a very important part of the economy and can affect everyone. It’s all about supply and demand: When more people want to buy stocks than sell them, the prices go up; when more people want to sell than buy, they go down.
This means that if you have any money in your savings account or retirement fund, it may be wise to pay attention to what happens on Wall Street.
The stock market crash can affect interest rates and the macroeconomic environment of the country. It increases the unemployment rate and affects the average person. During the financial crisis in October 2019 unemployment rate peaked at 10%.
Is the stock market only for rich people?
Stock market is a place where you can buy and sell stocks, representing companies’ ownership. Unfortunately, many people think that the stock market is only for rich people.
This argument is valid in reality. Though anyone can invest in the stock market, the majority of investment comes from rich people!
The Federal Reserve’s Survey of Consumer Finances shows that stock prices are favored by white and wealthy people.
More than half of American families invested in the stock market in 2019. But in 1989, only 32% of people owned stock. The households had a median value of $40,000 for stock.
The top 10% of incomes held 70% of the stock market value in 2019, and the portfolio has a median value of $432,000. The bottom 60% of earners held only a small percentage of the stock market’s value, which is 7%. The middle-class household had $15,000 worth of stock.
What percentage of Americans own stock?
Based on polls taken in April and July, Gallup found that 56% of Americans own stock. This is close to the average in both the year 2020 and the year 2019.
Conclusion
The stock market is not a good option for middle-class people if they’re willing to take the risk. You can invest in stocks up to 20% of your total savings. Diversification of your savings is a great option to reduce risks.
If you have money saved in your retirement account, do not invest it into stocks because this would be too risky and could lead to hardship later on in life. Investing wisely can help you earn more than just investing in bonds or savings accounts that offer minimal returns over time.
Diversify your investment in equity mutual funds, real estate, and the gold market to avoid all the hassles that come with investing in just one kind of asset class.
