The Importance of Financial Literacy in the Stock Market
NASDAQ stock market displays at Times Square. Photo: Bfishadow/Wikimedia
Financial literacy, while not a term that is commonly used in many households, is extremely important for everyone, whether you dabble in the world of stocks or not.
So, if it is indeed so important, why isn’t it something that everyone is aware of and is able to implement in their daily lives?
Well, we will break down exactly what financial literacy is, how it is relevant in the world of the stock markets and give some steps on how you can start achieving financial literacy for yourself.
What Is Financial Literacy?
While the definition of this term can become a bit complicated when you research different sources, with many people having a different opinion on what exactly it entails, it can be easily summed up in one sentence:
In essence, financial literacy is being able to understand and use various important financial skills, such as personal financial management, budgeting, and investing, which we will discuss in more detail later.
As you can see, however, financial literacy is not just a term that stockbrokers should be familiar and comfortable with; it is something that affects households across the country.
The ability to balance budgets, fund education for you or your family, build a stable retirement income, and even buy a home all fall within the bracket of the financial skills which you are expected to master in order to possess financial literacy.
In recent years, the financial landscape has changed for everyone, with some employees having to shoulder the burden of ensuring their own future financial stability, government aid possibly being sporadic or scarce for those who need it, and less adults being able to build comfortable savings with their money.
Therefore, it is crucial for financial literacy to be a common skill amongst all citizens, as it could be the difference between living a stable life and struggling to survive.
Financial Literacy and the Stock Market
So, why is financial literacy relevant when it comes to stock market participation? Well, actually, it is not only relevant, but a crucial aspect.
For anyone who is already involved in the world of stocks and investments, it will come as no surprise when we say that it is a difficult world to navigate. And, for those unprepared or those who do not possess the relevant skills, it can be an unforgiving landscape. Financial literacy represents several of the skills you need to demonstrate in order to find success in this ever-changing world. For example, let us delve into one aspect of advanced investment: day trading.
Day trading is a potential complex idea and requires you to be comfortable with money before even getting started with it. Under the rules of day trading, the term pattern day trader is a common one and stipulates under this term that the trader must have a minimum equity of $25,000 in order to be making four or more day trades. In the event the account drops below this value, they will not be permitted to day trade until the minimum amount has been restored.
While this may be a complicated rule to wrap your head around now, and if you’re interested in exploring it further, we recommend taking the time to read a guide that breaks it down in more detail, the simple take away of it is that you need to have at least $25,000 minimum equity in your account in order to participate. Without the necessary financial skills to build up this amount comfortably, you would find it impossible to get started.
Best Tips to Achieve Financial Literacy
Here are three simple methods to start boosting your own financial literacy:
1. Do Your Research
There are countless resources available to you for this, ranging from books written by experts to podcasts in which current stockbrokers and financial experts break down the best courses of action you can start taking.
Spend some time exploring everything until you are well-grounded, knowledgeable and find what best suits you as far as financial literacy in the stock markets is concerned.
2. Learn from the Experts
You must be willing to learn from the experts about financial literacy in everything that you do. We recommend actively seeking out experts for advice and useful tips in the stock markets.
While this doesn’t have to be a personal conversation, as many websites have newsletters and information you could sign up for as an example of an alternate method, it does give you the best opportunity to get your questions answered clearly by those who’ve been there and done it.
3. Plan and Execute Well
The best thing you can do to start taking charge and positive action on your own financial situation is planning well. Start by where you want to be and when you want to get there.
For example, do you want to stick a budget for the next month? Or maybe you want to save a certain amount and give yourself one year to do so?
Whatever your goals are, it is crucial that you take the time to plan it out first clearly. Then follow through and stay committed to your goals as much as possible. Execution of your financial plan is key.