People often ask this question that when everybody knows that equity markets are so risky and volatile then why do people invest in equity market, are they blind that they cannot see the risk involved or they have so much money that it does not matter if they lose it in equity markets. The answer to this question is neither people are blind nor they have extra money which they can afford to lose, rather there are some reason due to which people invest in equity markets, let’s look at some of the reason due to which people invest in equity markets –
1. First and foremost reason behind equity investment is the inflation factor, we all know that value of money erodes due to inflation over a period of time and therefore in order to guard against that risk people invest in equity market, which in the history has always given a better return than fixed yielding investments.
2. Another reason for equity investment is the need for diversification because nobody puts the money in only one asset class rather they tend to divide their investments into many asset class like gold, real estate, fixed deposits, bonds and equity and therefore to attain diversification people invest in equity markets.
3. Equity markets are risky only for those people who enter into markets thinking that they will double or triple their money in short period of time and it is this kind of people who gets trapped into equity market and make losses. An investor whose time horizon is between 2 to 5 years will never lose money provided he or she has made investment looking into the fundamentals of the company and also history of promoter of the company.
4. Equity market are perhaps the easiest markets to enter into and make investment as compared to real estate where one has to make so much effort to find the right property and also there are many legal formalities associated with purchase of land or house which is not the case with equity market. Equity shares are not exposed to danger of theft or fire or such things like gold which is exposed to all such dangers and therefore equity market scores over gold also.
As one can see that there are many reasons behind people investing in equity markets and people who make equity market investments are rewarded handsomely also provided they are patient and careful while investing in equity markets.