Understanding Why Do People Buy Shares: We’re going to answer one of the most obvious, yet important questions regarding the stock market.
It questions not only the practice of investing itself but also the purpose of the markets to retail investors. In the past two years, the two major indices (NIFTY 50 and SENSEX) have moved to climb to their all-time highs.
All the movement in the market, combined with the constant buzz of IPOs, dividends, and return on investments, is bound to make every market outsider ask one question – Why Do People Buy Shares?
We’re going to try and answer this question in this blog and highlight the importance and risks of investing.
Understanding The Meaning Of A Share
A company’s capital is divided into shares that are listed on public exchanges. These shares represent ownership of the company. A company lists itself on the stock exchange to raise capital.
This is called an Initial Public Offering or IPO. The IPO allows investors and traders to buy the shares of the company, once listed. The benefit for the company is that they receive funds in exchange for issuing its securities.
Now that you understand the meaning of shares in the market, let’s have a brief look at some of the reasons why people buy shares.
Why Do People Buy Shares?
The question “Why Do People Buy Shares?” can also be rephrased as ”Why Do People Invest?” or “Why are people involved in the markets?”.
One thing we can agree on is that they all do it to make money. But some might argue that there are other means of income, excluding investing and trading.
We’re going to look at some of the unique features that make the markets different from other forms of investments.
1. Hedging Against Inflation
The markets allow investors to hedge their savings against rising inflation. The value of the ₹ is not what it used to be 5-10 years ago.
To avoid inflation quietly destroying their savings over time, investors hold stocks as a hedge against rising inflation. Over time, the stock markets have outperformed the average rate of inflation.
2. Earn Higher Returns
Buying shares give investors the opportunity to earn more than traditional assets such as gold, bonds, and deposits. While shares carry a risk of loss, they also have the potential to double your money.
While your normal fixed deposits earn around 5-6% annually, the stock market gives you multiple opportunities to earn much more throughout the year.
For individuals who already have a solid portfolio in different assets, the stock market can give an option of diversifying their portfolio.
The stock market allows investors to build a diversified portfolio across different sectors. Almost every industry has listed companies, and this gives investors vast opportunities to build wealth.
4. Ability To Start Small
Most traditional assets such as gold, bonds, and real estate have one major entry barrier – huge capital. This limits the number of people who could buy and own these assets.
The stock market doesn’t have such limitations. A new investor can buy as little as one share of a company, with no minimum quantity limits.
Stocks come with the benefit of fast liquidity – they can be bought and sold quickly. This means they can be converted to cash efficiently. The same cannot be said for other investments such as real estate, which take a long time to sell.
6. Passive Income Through Dividends
An added benefit of buying shares is dividends. This is in itself a different form of investing called dividend investing, where investors pick stocks solely for receiving regular dividends.
Listed companies that earn profits distribute it to their shareholders either through dividends or additional shares.
7. Ownership Of A Company
In the points above, we stated that the stock market has no entry barrier and one can become an investor by purchasing even one share.
Plus, an investor can also call themselves the part owners of the company they love by buying shares.
Risks Of Buying Shares
As we have gone through the important and major reasons why people buy shares, let’s look at some of the risks as well. Every investment has certain risks attached to it.
While there are valid reasons to enter the markets, there are genuine grounds to not buy shares as well. Here are some of the risks of buying shares –
- If you have an upcoming expense, improper planning may result in you locking your funds in shares that may take a few days to liquidate. You need capital for huge upcoming expenses such as education, housing, wedding, and other planned expenses that require a huge amount of capital.
- The idea of having your portfolio drop by 10% or more is unbearable. The prices of stocks of a company keep fluctuating and this may have a negative impact in the short run.
- You are in need of an assured and fixed income stream, with low levels of risk. The company here is not obligated to pay dividends.
- If you have debt with high-interest rates (A credit card, for example), clearing it off is more feasible than investing.
- If you lack an emergency fund in case of unemployment, health issues, accidents, or other emergencies that require immediate cash in hand. Then investing in risky assets is not wise.
We have reached the end of this blog on Why Do People Buy Shares, stating reasons why people buy and do not buy shares. While both are quite valid reasons, the benefits of investing outweigh the risks if you know exactly what you are doing.
An additional income can benefit everyone, especially when inflation and the overall cost of living are at an all-time high. If you are still unsure about investing and want to learn more before making a decision, then Join FinGrad!
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