Here we’ll:
- Break down the biggest differences between these investment avenues
- Determine their advantages and disadvantages
- See which is the better investment for you
What Are Stocks?
Stocks are securities that entitle their owner to a fraction of a corporation’s equity—the company’s total ownership. Through holding stocks of the corporation, the holder is therefore entitled to the value of that company relative to their holdings, as determined by the company’s assets and profits.
Trading in the stock market is probably the most well-known example of investment. Stock trading is perhaps the most dominant way to invest, with financial hubs like Wall Street and its home New York Stock Exchange, becoming the face of what investing means in this country.
How Does Stock Investing Work?
Corporations sell shares of their company to generate funds to expand their operations. The trade-off for the corporation is they gain access to more resources to grow and generate more profits.
A corporation is considered a legal entity that is separate from its owners. It is subject to the laws of the in which it was incorporated. Corporations essentially act as legally created, (fictional) people, sharing many of the individual liberties and responsibilities that people have, such as entering contracts, suing and being sued, and paying taxes.
While shareholders are entitled to the equity of the corporation, they do not necessarily own the corporation itself. This legal framework means that while shareholders own shares of the corporation’s equity, they do not own the assets themselves.
This arrangement works in the shareholder’s favor if the corporation must declare bankruptcy. Shareholders do not have the same level of liability in these situations. While a corporation’s assets may be sold off when they go bankrupt, shareholders’ assets are not a risk.
The Advantages and Disadvantages of Stock Trading
There are reasons that stock trading is popular:
Advantages of Stock Trading
- Stocks are easy to buy
- Stock trading is easily accessible
- Investors can easily buy into the stock market
Stocks Are Easy To Buy
One of the reasons why stocks are as popular as they are among casual investors is that they are one of the easiest asset classes to buy. This is especially true today, where smartphone apps have simplified the stock brokerage process.
Stock Trading Is Easily Accessible
Stock trading is one of the most accessible ways to invest one’s money. Stock prices can range from pennies to hundreds of dollars, with every price in between available for investors to buy into.
Investors Can Easily Buy Into the Stock Market
The relative ease with which investors can buy into the stock market points to another one of their advantages as an investment: their liquidity. Liquidity is a financial metric measuring the ease with which a given asset can be turned into pure capital.
The faster an asset can be turned back into money, the higher its liquidity. Stocks are one of the most liquid assets available to investors. Day traders will buy and sell stocks within a span of hours, utilizing the high liquidity in the stock market to make fast profits.
Compared to other investments, stocks have a low financial threshold necessary to start trading. Stocks can be bought by the share and are often free from commission prices, depending on your broker.
Disadvantages of Stock Trading
- Stock trading is risky
- The stock market is volatile
- The market can fluctuate daily
- Trading stocks is fast-paced
Stock Trading Is Risky
Trading on the stock market can be risky compared to other investments. Depending on market performances, it is plausible that you could lose all of your investments if your portfolio tanks. The stock market isn’t known for its predictability.
The Stock Market Is Volatile
You can do all the research possible before you choose your investments, but all too often, factors completely outside your control can disrupt the market and drastically affect your investments.
That’s because the market has high volatility, with fluctuations in the market requiring a great deal of risk tolerance from stock investors. In a globalized economy, where market trends in communities across the world can affect general economic trends in the exchange, stability and security are not the defining factors associated with stock trading.
Corporations can be highly correlated, so even a moderately diversified portfolio of stocks in different sectors can suffer when drastic market disruptions affect the economy.
Your investment portfolio’s diversification also comes at a cost. Index funds and certain mutual funds and ETFs are often recommended by financial advisors as suitable for retirement accounts, and this is because these options are diversified enough to hedge against the market’s wild volatility. However, the lower degree of risk translates to lower returns.
Additionally, even the safest stock portfolios are often more risky than real estate portfolios, and real estate offers certain benefits that stocks simply do not.
The Market Can Fluctuate Daily
The more involved you are in trading, the more closely you need to follow rapid market trends just to keep up with the trades that will keep your portfolio in the green.
Trading Stocks Is Fast-paced
The fast-paced nature that the market moves at can make for an investment experience characterized by high stress.
How does real estate factor into the investing world?
What Are the Types of Real Estate Investments?
- Private ownership
- Rental properties
- House flipping
Real estate investments refer to a wide range of investment options. Here are a few ways investors can invest in real estate assets.
Private Ownership
Private ownership strategies start with an investor acquiring a property on their own, then using that property to generate an income. There are a few ways that the property owner can generate that income with their real estate assets.
This is the type of real estate investing most people think of when they consider real estate investments.
Rental Properties
Leasing real estate assets is a common way real estate investors earn an income from property management. In the case of individual investors, most rental investment properties tend not to be commercial real estate, but residential—properties like single-family homes, condos, mobile homes, or multi-family units.
The owner of the property, or the landlord, earns a passive income from their property through the rental income paid to them by their tenants. The amount paid by the tenant is dependent on the contract written up by the landlord.
Depending on the contract, tenants might cover utilities like gas, electricity, and water in order to minimize ownership costs for the landlord.
In the end, the landlord earns their income by setting the price of rent at a level where they are generating a profit against their initial investment in the property and the ownership costs they pay on the asset.
House Flipping
House flipping is when a real estate investor acquires a residential property and then resells it for a profit after a short period of repairs and maintenance.
In general, the housing market reliably rises over time. House flipping relies on the general trend of increasing property. In addition to rising prices for homes, house flippers capitalize on the increase in value by making repairs on the home that boost the price of the home even more.
Home renovations can significantly boost the value of a home price. While prices for homes continue to skyrocket, a few well-placed renovations on a fixer-upper can make investors a serious profit on their real estate investments.
Advantages and Disadvantages to Real Estate Investing
Here are some benefits and drawbacks to real estate investment for you to consider before jumping in.
Advantages to Real Estate Investing
- Real estate’s investment value is considered appreciation
- Real estate investments are a hedge against inflation
- Real estate is a safe investment during inflation
Real Estate’s Investment Value Is Considered Appreciation
One of the strongest advantages to real estate investment is that real estate’s value has a consistent appreciation. In most areas, real estate’s value rises yearly because the property is usually a high-demand asset.
A number of trends drive the appreciation of real estate: population growth, increase in the job market, inflation, and development in the immediate area. Property owners have the opportunity to boost the appreciation of their assets by making home repairs themselves. Fortunately, real estate hardly ever experiences depreciation. When real estate property values do dip, it tends only to be short-term.
Real Estate Investments Are a Hedge Against Inflation
The fact that real estate tends to appreciate due to inflation makes it a reliable hedge against inflation—an investment that offsets the rising costs brought about by inflation.
Historically, real estate appreciates faster than the rate of inflation. When prices rise across the market, real estate value rises as well, offsetting the weakening purchasing power of the dollar.
Real Estate Is a Safe Investment During Inflation
Inflation only precipitates the appreciation of value in the real estate market. Furthermore, even during inflation, real estate assets generate steady cash flow for their investors.
Disadvantages of Real Estate Investing
- Real estate investing is notoriously illiquid
- Real estate is slow to move
- Repair costs can increase rapidly
- Missed rent and legal fees cause serious disruptions
Real Estate Investing Is Notoriously Illiquid
To get the capital back out of a real estate investment, investors have to find a buyer, close on the property, and then wait up to an entire month until they get their payment. Additionally, there are closing costs and transaction costs that make the process expensive.
Real Estate Is Slow To Move
Add to that the fact that the high ownership expenses, the prices of real estate investment can add up quickly, leaving investors in the red. Real estate investors can get stuck with properties that are more costly than they anticipated.
Repair Costs Can Increase Rapidly
There are many ways that unforeseen maintenance expenses can surprise investors and eat away at their earnings.
Missed Rent and Legal Fees Cause Serious Disruptions
Investors may be taken to civil court if they rent their properties to unreliable tenants. Rental income is a steady earner when landlords have reliable people living in their properties. But you can never know what can happen with tenants.
Real Estate vs. Stocks: Which Is Better?
There are options out there that serve as a best-of-both-worlds scenario for investors, like private equity real estate funds or real estate investment trusts (REITs).
Private equity funds allow investors to invest in high-value real estate assets at a fraction of their cost. They save investors the hassle of managing the properties, earning their investors a return on the assets in their portfolio like shares from the stock market.
For investors that want an investment that gives them the best of real estate and stock trading together, private equity funds are your best option.
Christina: Invest With The Best
Investing is nothing to take lightly. When you’re putting your money on the line, you want your investment to be as close to a sure thing as you can find. Making sure that you’re investing your money in the right way is the most important facet of successfully growing your wealth.
Christina has over four decades of success in one of the country’s most lucrative real estate markets: Los Angeles’ Westside region. We’ve thrived due to a niche market investment strategy that helps us secure great annual returns for our investors year after year.
Get started with Christina today to gain access to some of the best real estate assets in the country.
Sources:
Average Sales Price of Houses Sold for the United States | Economic Research