1. Self custody is hard. You need to understand how to setup a wallet. If you lose the keys to that wallet, your money is gone. Opening an account on an exchange is so much easier, and there is usually a way to reset your password if you forget it.
Exchanges provide an online-banking style experience that most people are already familiar and comfortable with.
2. Access to markets. If you hold funds somewhere else, it takes quite a bit of time and effort to move it back onto the exchange so you can sell it later. It only really works for people who want to buy some coins and stuff them under their mattress until later. For anyone who wants to play the markets, you kind of need to keep your coins on the exchange.
Additionally, holding coins on the exchange is free. You don't have to pay the transaction fees to withdraw and deposit, which can add up, especially on congested blockchains like bitcoin and ethereum.