Why do investors prefer investing in common stocks

There can be many compelling reasons why people take interest in the stock market. In this article, we will be discussing the most common reason why investors prefer to invest in the common stocks.

People want money, more money, to accomplish their financial goals.  Therefore, they set aside money for saving and invest them wisely to grow their wealth.

From their savings, they invest in assets to earn a satisfactory rate of return to fund their future goals. Here are few popular options they choose to invest;

  • Fixed deposits
  • Recurring deposits
  • Public provident fund
  • Government Bonds
  • Common Stocks
  • Insurance
  • Corporate Bonds

The main objective is to invest to increase the future purchasing power that can keep ahead of inflation to provide financial security.

Here we are talking about long term investment, not for a short-term.

If the rate of return from your investment is not satisfactory to take care of your future goals, then a sense of security can quickly change to a sense of frustration.

Therefore, the rate of return on your investments should be enough to exceed the rate of inflation. If it’s less than the rate of inflation, then you are losing future purchasing power.

The reason why many individuals stick to fixed deposits, recurring deposits and other bank and post office deposit schemes, is because it’s less risky. However, many investors do not prefer these less risky investment options as it gives very less return to take care of the future purchasing power.

As per record, over a long period of time, common stocks have always outperformed all other types of investments. Remember, long term means at least more than 5 years. If your goal is for a short-term, you can try any risk free investments.

Here is a link from bloombergquint.com where you can see the historical long term return of different indices.

Stock market is very volatile. Which makes the price of common stocks to become more volatile than any other type of investments. To reduce the variability of the return, you have to invest in the stock market with a long term horizon.

Money in stock market can be made in two basic ways;

  • Growth in share price also known as capital appreciation, and
  • Regular Income from common stocks, which is known as dividend

Here are the most important reasons why investors prefer common stocks over any other investments.

Gives higher return

Probably the main reason why people invest in common stocks is because it’s capable of producing higher return in comparison to any other investments.

You can compare stock market return over 10 years with any other investments. You will find that over the years common stocks have performed well.

It doesn’t mean that you should go and buy any common stocks from the market. You need to do your research to select the best common stocks fit to your investment portfolio to buy.

Common stocks helps in diversification

Common Stocks helps investors to easily diversify their investment portfolio by investing anytime they want. For instance suppose, you have invested a large amount of money in real estate in your city, now you do not want your entire portfolio in real estate in one city. 

Based on your purpose by sitting at the comfort of your home, the stock market allows you to invest in any common stocks based on your investment goal in order to diversify your portfolio.

 Affordability

Stock market allows you to invest a small portion of your income based on the lot size you want. You can start by buying common stocks of fundamentally strong companies by paying Rs 500 to Rs 1,000 and even less than that.

Starting with the stock market does not require a lot of money. Whereas if you want to invest in real estate, you need a large sum of money to get started.

Regular income from common stocks to beat inflation

Many investors over the years accumulated fundamentally strong dividend paying blue chip stocks to get regular dividends for their retirement life.

These companies pay dividends based on their earnings which helps the investor to take care of their living expenses in absence of any regular income.

Stock market also brings higher risk and volatility. Which means income from the stock market is not guaranteed. Any wrong investment can wipe out your entire capital invested. Therefore, you need to educate yourself to understand how the stock market works and how to make profit out of it.

If you are a beginner and do not have much time to track ups and downs of the stock market and company’s fundamentals, go for mutual funds. 

By investing in 4-5 mutual funds, your money will be invested in a well diversified portfolio, managed by a professionally qualified fund manager. You can take help of a financial expert to select 4-5 mutual funds based on your purpose and risk tolerance.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.