Over the past few decades, capital markets in the developed world have become increasingly accessible to the middle class. Formerly, one had to be wealthy and connected to benefit from the world’s financial markets due to the expense of making trades and conducting research. Legendary investors like Benjamin Graham were able to uncover screaming bargains (like companies selling for less than last year’s working capital), primarly because so few other investors were doing the same kind of research. Simply put, it was hard, hard work and you had to know what to look for. If you did, the rewards could be massive. If not, well…
Technology Changes Everything
The advent of affordable computer systems was what spurred the shift towards democratization. Less expensive communication technology allowed investors and institutions to share sophisticated financial data quicker and cheaper than ever before. Whereas before it could take days or even weeks to receive the information you requested in the mail, suddenly it was possible so receive this information simply by making a trip down to your broker’s office, which was a huge improvement at the time. Eventually, the advent of the internet made it possible to obtain practically anything you wanted to know instantly from the comfort of your own home for a nominal fee, if not completely free.
The effects of this rapid spread of financial data have been startling. This blog is a prime example of just how much the game has changed, even just over the last decade. The amount of information at my fingertips I could choose to write about at any given moment is almost overwhelming. With a quick google search, I can do research for an article in 30 minutes that before would have taken a lengthy trip to the local library, at the very least. I can discover the details of the economic environment in Chile or espouse my views on the presidential candidates economic policy with the click of a button.
What Does This Mean For You?
For the middle class, these changes mean you have the opportunity to participate in the prosperity of America and indeed any nation on earth like never before, without committing massive amounts of capital. In fact, there are quality, well-diversified mutual funds with minimums as low as $500 to start. Not only that, but achieving above-average returns is as simple as buying and holding an index fund: no fancy research required.
On the other hand, the democratization of markets has made things a bit more difficult for the investing elite. Where they once had a monopoly on important financial information and had ample time to act on it before the news got out, today that has become increasingly difficult if not impossible. Profiting from superior research is much more difficult than it used to be, and the rewards for success much smaller as well. So in that sense, democratization has actually been bad for some investors. For the little guy who just wants to save for retirement without expending massive amounts of time and energy doing research, this is a great thing. For those on top, it’s not so great. As expected, the free market has bridged the gap between the rich and poor.
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1 Should Young Investors Use A Financial Planner? | Amateur Asset Allocator // Oct 23, 2008 at 7:02 am
[...] the increasing democratization of financial markets in recent years, in my personal experience there seems to be a sort of counter-movement away from [...]
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