Why people prefer custodial wallet?
1. They can generate more coins by staking etc.
Those people don't have the knowledge of bitcoin because bitcoin isn't a coin for staking since it uses POW and not POS. Secondly, how much profits will you generate for staking your coins, it means that you are gambling with your investment. If your bitcoin is in your self custody wallet as the price increases, you see your profit.
2. It's cost efficient, they don't need to pay transaction fee, trading very is very cheap.
Currently, bitcoin transaction fee is very cheap as you can pay below 1sat/Vbyte for sending funds. I know that you cannot trade without an exchange which is the reason why only traders should keep their trading funds in the exchange.
Your funds can be freezed by exchange if the government is investigating you.