Why We Invest....

As per an economist, when people earn a dollar; they do one of two things with it: they either consume it in the form of spending or save it. A distinction can be made between saving and investment. Some people keep money in the bank that yields nominal interest with minimal risk. Assume you are earning 10% interest per year on your bank deposit and the inflation rate turns out to be 13% in that particular year. In that case you are actually losing 3% per year. Investment in the stock market can make abrupt returns, though it does carry risk. KSE has invincibly risen more than 40% this year. This is the core reason that motivates people invest in financial markets.

“Investing is risky but saving is not.”

Reasons for Investing

People invest to …

1)   Supplement their income through :

a)   Periodic Dividend and Interest receipts; &

b)   Capital gains though price appreciation

2)   Experience the excitement of the investment process

Factors behind Investments in Stock Market

An investor while investing in the stock market keeps in mind the following factors.

·       Opportunity Cost: It is the cost an investor bears as a result of preferring an investment (stocks) and losing its alternative (saving account). The investor invests in the stock market if the opportunity cost is lower thereon.

·        Tradeoff between Risk & Return Risk comes in many forms, but when talking about the risk-return tradeoff, the primary measure of risk is volatility. For instance, stocks can fluctuate widely from one year to the next (or even from one day to the next), whereas the swing in bond prices tends to be less dramatic. Tradeoff between risk and return is based on the concept that an investor should be compensated for risk in an investment vehicle with equal magnitude of return i.e. risk and return should be at the same level.

·        Liquidity: Common stocks and bonds are traded on exchanges. Liquidity is the ease and ability of selling your investment in the marketplace without losing money.

·        Term: How long investor is planning to hold his investment.

Whereas in the insured saving accountholders will get the profits on yearly or interim basis only, the tendency of gains or profits is higher and not time restricted.