What is Investing?
It is the committing of resources into some endeavour or thing in the expectation of a positive return.It may be stocks or real estate or others.
In the case of financial investment, the resource being committed is money, the endeavour is a financial investment which may be stocks, mutual funds, real estate, or recurring deposits, etc. One might not always end up getting back positive returns because of the risk factor involved in investments. The potential of greater returns comes at the expense of higher risk.
Benefits of investing:
- It protects the purchasing power of money and helps us through periods of inflation (increase in costs).
- Investing helps in increasing the amount of money invested if good returns occur.
- It helps in meeting the financial goals.
Investing in real estate:
Real estate is to find the property consisting of land along with any resource found in the ground or above and buildings. It is a highly lucrative industry that made many people extremely wealthy. For a very long time, people who owned a greater number of lands were powerful such as the nobles and the royals.
Real estate is a great way to hold your wealth. It is capital intensive and is not a scalable business. It is ideal for putting the extra cash in real estate investment, instead of taking loans and leverage.
Advantages of investing in real estate:
- It is a secure feeling to own land and the pride is immense.
- Investing in it enables us to generate passive income.
- Real estate development companies or REITs (Real Estate Investment Trust) for liquidity in real estate investing.
- There are several tax advantages when invested in real estate.
- It is a tangible investment, and not based on just an idea.
Disadvantages of real estate investment:
- Low liquidity involved.
- You may get low returns, and there is no guarantee of high return.
- Real estate investment is unpredictable.
- Tracking it is difficult unlike tracking the mutual funds.
- While buying a real estate property, there exist additional charges like registration fees. Maintaining the property, insurance, etc. add up to the additional charges.
Investing in stocks:
Stocks are a common type of investment. A stock refers to partial ownership of a company. When we purchase a stock, it means that we are buying a piece or share of a company. It means that we own a share of the company.
There are two ways to make money by investing in stocks. They are: by stock appreciation, which is the buying and selling of the stocks when the cost increases and by dividend, which is to acquire a part of the company’s earnings. It is suitable for people who can accept the higher risks of investing in a stock.
Advantages of investing in stocks:
- High returns are obtained when the stocks are bought when the market is down and sell when it is high.
- With the increased risk, there is a greater potential for good returns.
- With the help of several techniques like having a proper investment plan, creating a diversified portfolio by buying stocks of different companies, investing through other modes of investment, and learning trading strategies will help to successfully invest in stocks, and receiving profit.
- Stocks present high liquidity, and the stock owners can buy and sell the stocks relatively easy.
- There are earning reports of the companies which help in providing high transparency to choose whether to invest or not in the stocks.
Disadvantages of investing in stocks:
- Shares in the stock market do not always go up, and prices may change unpredictably.
- It involves higher risk.
- There is a lack of control over the strategic decisions of the company.
- There is a chance of high volatility.
Real Estate vs Stocks
The stocks tend to increase in value quicker than the real estate. Over a long period, and the S&P 500 index (Standard and poor’s) fund has historically produced total returns in the nine to ten per cent range. Meanwhile, real estate prices tend to replace inflation by a small value. Stocks have generated nearly seven per cent per year after inflation. The stock market seems to have generated returns at more than four times the rate of real estate profits. When viewed through this angle stock markets appear to be a better investment.
Real estate as an investment has a higher return potential. It is irresponsible to invest in stocks using borrowed money, but it can be used to finance real estate dealing. Price swings of the real estate market tend to be less dramatic than the share market swings. The additional costs of the real estate investment are to be subtracted from the returns obtained. Real estate is better to invest in as there is a chance of obtaining a passive income by giving the property on lease or by using it as farmland. It can generate income. There are greater tax benefits (tax deductions) when invested in real estate compared to those in the stock market. The strategy of buying and holding the property would lead to higher returns.
When the S&P 500 stock index is compared with one of the successful real estate companies, there was no noticeable difference for the first few years but, after a long time, the real estate investments pay good returns.
A lesser amount of money is required to buy stocks when compared to real estate investment. Hence it is easier to get started. Even if the investor is rich or poor, he or she can invest in the number of shares they can afford, unlike the real estate investment. When invested in stocks, we are investing in a business that has the potential to grow into a bigger business, when wisely choose in the right company, and it can give higher returns in the relatively short term as well.
Depending on your financial goal, amount of money that you want to invest, and other factors along with the information provided above, it will be easier to chose what kind of investment is better among the two.