Question

Explain why a financial investor in stocks cannot

earn high capital gains simply by buying companies with a demonstrated record of high profits.

Short answer

The stock market is heavily saturated with buyers and sellers, so any opportunity for significant gains will have massive demand, driving the price up till the gains are no better than an alternative. There is also a general uncertainty and risk with stocks, as any company stock can become worthless if something catastrophic occurs.

Step-by-step solution

Step 1. Reasons it isn't as simple

1. A charge on the profit earned from an investment is referred to as capital gains tax. it can either be long-term or short-term. This tax reduces potential profit.
2. Catastrophic risk can occur in stocks, as some have no minimum value guaranteed to pay back their shareholders.
3. Any high-profit yielding opportunities in the present will be recognized and demand will drive the share price up until the high-profit is no better than other alternatives.