Navigating the equity maze: The nexus of financial literacy and stock market participation in Nigeria

The global disparity in wealth accumulation is increasingly attributed to differential participation in capital markets, particularly within emerging economies, where informal savings mechanisms dominate. This study investigates the relationship between financial literacy (FL)—encompassing knowledge of investment products and risk management—and investment decisions (ID), specifically stock market participation (SMP). While existing literature establishes a baseline correlation between literacy and participation, few studies have concurrently analyzed the moderating and control effects of demographic factors (DF), psychological factors (PF), economic factors (EF), market factors (MF), and institutional factors (IF) within a unified framework. Utilizing a quantitative research design, this paper employs a pooled cross-sectional regression analysis on primary data collected from retail investors in Nigeria, a representative emerging market characterized by high volatility and infrastructural challenges. The findings reveal that while financial literacy is a significant positive predictor of stock market participation (B = 0.342, p < 0.01), its efficacy is heavily contingent upon institutional trust and psychological resilience. Psychological factors, particularly loss aversion and overconfidence, were found to mediate the relationship between literacy and action. Furthermore, institutional factors such as regulatory transparency and market infrastructure emerged as critical binding constraints; high literacy alone could not overcome systemic institutional deficits. The study contributes to the behavioral finance literature by proposing an integrated "Literacy-Environment-Behavior" (LEB) framework. It offers actionable recommendations for policymakers, including the integration of behavioral nudges in financial education curricula and structural reforms to enhance market integrity. These insights are pivotal for designing interventions that not only educate investors but also create an ecosystem conducive to translating knowledge into capital market engagement.