Why stock markets will always give better returns than your fixed deposits

The fixed deposit rates are indicative of the risk free rate of return. Since such rates are guaranteed by the bankers/financiers they carry minimum or no risk tag on them.

This risk free rate of return is defined as the return earned on investments with negligible risk

For an enterprise to attract equity capital from its promoters / shareholders, it must promise and deliver returns higher than what the investors can secure by investing in the risk free domains. In other words the enterprise, to attract funds, must deliver higher returns than the risk free rate of return.

Let us understand through a hypothetical example:

There are 100 companies listed on the NASDAQ. Each one of these companies is fighting in the open market to acquire capital from the investors. The enterprise offering the best matrix of risk and return ratio would be winning the best of the investors. In other words the investors would put their money in the enterprise which offers the best combination. The market (investors) would never park their money in any of these enterprises unless they see a probability of earning a return higher than what the fixed deposits offer.

Return on Investments in market would then mean:

Risk free rate of return + risk premium = expected rate of return from the enterprise

The stock market is the combined representative of all enterprises. If the market, (enterprise), needs to attract funds, it must give a premium over the risk free rate of return or the fixed deposits. Otherwise the investors are well

off by parking their funds into fixed deposits.

The stock markets, in the long run, will always give a ROI (return on investment) better than the fixed deposits.