Question

It is often said that investors like "certainty". When the stock market wobbles, commentators often blame rising levels of uncertainty. Using concepts elaborated in chapter 6, discuss why you think markets like certainty

Answer 1

Case Specifics

As an investor, when we put our money into a market, we expect a decent amount of returns over the years. When markets in a country are relatively stable, meaning that they tend to give constant returns or average rate of return is relatively similar, then the choice of the customer eases out.

A major reason for shares of big companies to be valued relatively higher is the brand value and worth which they attract. Brand value for an investor implies stability and this stability would mean that the amount of money invested into the company is relatively safe.

For example, people from across the globe prefer to invest in the United States because of stability in markets, politics and development of the economy.

Markets like certainty because the investments of people flow relatively frequently and therefore growth can take place and capital can be raised relatively quickly for new ideas thus fuelling the development of organizations.

Whenever we invest in markets, we can expect a certain element of risk involved in the transaction. If this basis of risk were to go beyond expected limits this would not be variation but instability and uncertainty.

Conclusion and Explanation: -

Thus, we can conclude by saying, that stable markets bring in constant inputs of investment for companies which are very helpful. Further, without stability the end product would not be able to sell and companies would generally collapse leading to big problems in any economy.

It is a common trend that people will therefore invest in bigger companies as even though their returns may be relatively lower, they still offer protection from instability.

Instability brings with its financial implications such as shortage of demand, price rises, companies having low profits etc. This is not recommended or liked by any mature market respectively.

Please feel free to ask your doubts in the comments section if any.