Financial Literacy and Stock Market Participation: What the Research Shows

Financial literacy and stock market participation rise together. In one study, van Rooij, Lusardi and Alessie (2011) found that Dutch households with low financial literacy were much less likely to own stocks. Studies using US and German survey data point the same way, and confidence in one's own knowledge matters too: it accounts for about 30% of the gender gap in measured financial literacy.

Most of this evidence is observational, so it shows association and cannot prove that knowledge alone moves people into markets. Two of the studies, the Dutch one and the German one, used instrumental variables (an outside factor that shifts knowledge but should not directly shift investing) to test which way the link runs.

Practice with simulated money

The research below ties participation to two things: knowing how markets work, and trusting your own read of them. A lesson can teach the first. Confidence plausibly grows from making a call and seeing how it turns out, though none of these studies tested that, and real money makes the experiment costly for a teenager.

Investing is one of the six pillars of the Council for Economic Education framework in our curriculum, and students practice it with simulated $10,000 portfolios priced in real time. They choose the companies, so a decision about one they know can be checked against live market prices. Students can be wrong with simulated money and then work out why. No study listed here tests whether that kind of practice changes who invests as an adult.

What did the original study find?

Start with van Rooij, Lusardi and Alessie, "Financial literacy and stock market participation," Journal of Financial Economics, 2011. The authors added two modules to the Dutch central bank's household survey, one on basic knowledge (interest and inflation) and one on advanced knowledge (stocks, bonds, mutual funds and diversification). The abstract's finding is that people with low literacy are much less likely to invest in stocks.

Every figure in this section is from the 2007 NBER working paper, not the journal article, so the published numbers may differ.

• Dutch respondents handled basic ideas like inflation and compounding better than the ideas behind stocks, bonds and diversification.
• In the working paper's sample, 23.8% of households owned stocks or mutual funds. Among respondents in the lowest quartile of advanced literacy, only 8% did, and in the second quartile only 15%.
• Comparing otherwise similar respondents (same age, education, gender, income and wealth), those one standard deviation higher in advanced literacy had participation more than 8 percentage points higher. A university degree went with more than 9. Eight points is about a third of the sample's overall ownership rate.

The authors also asked how much of each person's schooling had been devoted to economics and used the answer as an instrument. The literacy effect stayed positive and significant, and the instrumented estimate was larger. A test of whether the plain and instrumented estimates differed did not reject that they were the same.

Does the same pattern show up in other countries and surveys?

It does, in different data and with different designs. The table lists the studies we read.

The Cupák row follows the working paper's abstract; the Economic Modelling version may word its findings differently.

In the German data, 76.5% of stock owners answered all three standard literacy questions (on interest, inflation and risk diversification) correctly, against 57.4% of non-owners. The gap is about 19 percentage points. It also shows that more than half of non-owners had the basics down, which matters for the limits below. The paper's instrumental-variable estimates point the same way as the plain ones.

How does confidence fit in, and what does it have to do with the gender gap?

In Bucher-Koenen, Alessie, Lusardi and van Rooij (2025, Management Science), the authors designed survey modules to separate what people know from how sure they are. In the working-paper version, women answered "do not know" disproportionately often, and when that option was removed, many of them gave the right answer.

The published abstract reports that confidence accounts for about 30% of the gender difference in measured financial literacy. That 30% is a share of the literacy gap, not a measure of how much confidence matters for investing. Separately, both knowledge and confidence are linked to stock market participation.

The US evidence agrees on direction. The Federal Reserve paper above found that confidence in one's own financial skills was associated with a higher chance of holding risky assets and bonds, on top of objective literacy.

A reasonable hypothesis, not a finding: someone who knows the material but answers "I'm not sure" may stay out of the market anyway.

Where the stock-ownership evidence stops

• It mostly describes association. People who know more about finance also tend to have more education, more income and more wealth, and the studies control for these without removing every difference between people. Khan and colleagues note that, before their study, the literacy-investing link was still described as inconclusive.
• The causal designs have assumptions too. The Dutch instrument assumes that time spent on economics at school affects investing only through knowledge. The German authors say endogeneity remains partly present through omitted variables and reverse causality, and their instrument drops the roughly 27% of respondents who were not in the 2017 wave. Any instrument is an argument that readers can accept or reject.
• Knowledge does not settle it. In the German data, about 62% of respondents who were asked all three questions got them all right, yet only 23.1% of the full sample owned stocks directly or indirectly. In the Dutch working paper, most university graduates still did not hold stocks.
• The confidence evidence is thinner than the knowledge evidence. In the Federal Reserve working paper, the relationships break down for how much of their wealth investors put into risky assets, as opposed to whether they invest at all.
• Measurement matters. The Dutch authors found that measured literacy is very sensitive to how a question is worded.
• These studies are about adults. None tests whether teaching teenagers, or letting them practice in a simulator, changes their investing later.

Classroom moves that follow from the research

The studies point to two gaps, advanced concepts and confidence, and four classroom moves follow from that.

1. Teach past the basics. In the Dutch data, interest and inflation were understood better than the ideas behind stocks, bonds and diversification, so spend your time there. For a starting point, see how to teach investing to high school students.
2. Pair answers with confidence. Ask students to answer a question about diversification and then rate how sure they are. Comparing the two shows you who knows more than they think. This adapts the "do not know" finding for a classroom; the studies did not test it in schools.
3. Make students commit. Have each student choose a holding, write the reason in a sentence, then check it against prices a week later. The point is to practice acting on a view and revisiting it. The benefits of stock market simulation covers how teachers structure that.
4. Notice who hedges. Ask for a best guess first, then compare: a correct guess after a hedge is a confidence signal, and a wrong one is a knowledge signal.

Teachers planning an investing unit can request a free Rapunzl demo and ask our team about the curriculum and simulator.

By Myles Gage, Co-Founder and Chief Executive Officer at Rapunzl.