Why people invest in stocks?|Capital Budgeting Techniques


Why people invest in stocks?

Investors buy, hold and sell financial assets to earn returns on them. Within the spectrum of financial assets, why do some people buy common stocks instead of safely depositing their money in an insured saving account with a guaranteed minimum return? Describe the factors/characteristics that investors keep in consideration while preferring investment (stock, bonds, etc) over saving.

Higher Returns:

Investors looking for higher returns prefer to invest in common stocks instead of safely depositing their money in an insured saving account with assured minimum return. As risk is high if investor invests their money in stocks, therefore they are expecting higher returns.

Risk takers

People with conservative approach prefer to invest in saving accounts. Risk loving investors prefer to invest in volatile markets rather keeping their money in saving accounts where they get only nominal returns. Sometimes frequent trades result in merely breaking even. In volatile capital markets, only informed investors earned more while there are chances that few lose their own money even.

Appreciation of assets:

More interested in seeing increase in their wealth rather in receiving any return.  While if they invest in savings accounts, there is no increase in the value of the amount invested, investors only enjoy benefit of getting return in the form of interest which is most of the time unable to cover the loss they face due to increase in inflation.

Supplement income:

Investment in stocks provides income through the payment of dividends. Payment of dividend is not the obligation of the company. Therefore this is not a confirmed source of income nor you are confirmed how much you will get if dividend declared. On the other hand, while depositing amount in saving accounts, you have relatively better idea of when and how much you are going to receive your supplemental income in the form of interest.

Improving financial standing or living standard:

Investment in saving accounts is relatively safe but low yield probably would not keep up with inflation and results in lowering buying power of the investor. Investors looking for improving their financial standing prefer to invest in stocks.

Young Vs Old investors:

Young and middle-aged people prefer to invest in stock market with higher risk and higher returns while people who are reaching retirement age have a preference to invest in saving accounts with low risk and low returns over stocks. 

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