Investment in the capital market generally yields a higher return for investors than the money market. Which of the following is a reason given for this?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → There is scope for earning capital gains in equity shares.
Option (1) Its securities are marketable on the stock exchanges. — Incorrect. Marketability on the stock exchanges is why capital market securities are liquid. Being easy to sell does not raise the return an investor earns.
Option (2) Its instruments are issued at a discount and repaid at par. — Incorrect. Issue at a discount and repayment at par is how treasury bills and commercial paper work in the money market.
Option (3) Its value of units of securities is generally kept low. — Incorrect. A low value of units explains the small investment outlay, which lets small savers invest. A low unit price makes investing easy but does not raise the return.
Option (4) There is scope for earning capital gains in equity shares. — Correct. Equity shares may later sell at a higher price. This scope of earning capital gains is the first reason for the higher return. The second is that shareholders get high dividends and bonus issues as the company prospers.
NCERT (Pre-rationalised Edition): “(vii) Expected return: The investment in capital markets generally yield a higher return for investors than the money markets. The possibility of earnings is higher if the securities are held for a longer duration. First, there is the scope of earning capital gains in equity share. Second, in the long run, the prosperity of a company is shared by shareholders by way of high dividends and bonus issues.” |