Deciding between two common types of investments, real estate or stocks, is difficult. There is no clear-cut choice between the two. Instead, it depends on your investing personality and preferences. It is also important to know how each type of investment is managed because they differ completely from each other.
The first thing you need to consider is your investment goal, and you can build your strategy from there. Do you want to invest for your future retirement? Or do you want to invest for your children’s college fund? Or better yet, you may be looking for a reliable residual income?
Real estate and stocks easily come to mind as an investment vehicle. Not only are these the most common, but they are also the ones that are guaranteed to bring a sustainable amount of yield. It is, therefore, important to know the benefits and drawbacks of each form of investment to help you decide.
Real Estate Investment
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There are plenty of benefits to real estate investing.
Real estate investing is one of the oldest methods of investment. It involves the purchase of a piece of land or property. It could be a raw lot or a house and lot (or some commercial building). There are different types of real estate investments that you can own.
The first one is a parcel of land that you have to shell out money for. For example, you have to pay for the real estate taxes and the maintenance of that parcel of land. Your long-term goal is to sell that plot to real estate developers. Holding on to that piece of land might entail some costs, but the value of real estate appreciates over time. Depending on where your property is located, the appreciate rate could be higher, so the value of the land will be considerably more than what you purchased it for.
Another type of real estate investment is income-generating. This includes apartment buildings, rental houses, or condominium units from Precondo. Tenants who occupy your real estate property will send you payments on a monthly basis. You use that to cover your real estate expenses and the difference will serve as your profit.
There are many markets which offer great options income-generating apartments, both domestically and overseas, so it is well worth considering a foreign investment in this case. The cost to buy property in the UAE, for example, is relatively low, especially when tax concessions are taken into consideration. However, these properties have a large income earning potential. The booming trade and business sectors in economies like the UAE mean there is a high demand for rental properties from expats and foreign workers.
Lastly, there are REITs or real estate investment trusts. These are companies that own multiple real estate properties that generate income. You invest in those companies and share with their profits instead of managing a property of your own. This is great for investors who do not have the time to manage a property themselves.
The primary advantage of real estate investing is the familiarity of this investment vehicle. It is also a tangible investment, which makes it easier to avoid fraud. Real estate has served as an inflation hedge over the years. All of that is beneficial to investors, especially for first-time investors. And for most people, it is a straightforward investment so anyone can jump on it. It also lacks the volatility involved with other forms of investments, such as stocks.
The only downside to real estate investing is that it involves a lot of work. It also requires you to shell out a lot of money initially before you can enjoy your profits.
Investing in Stocks
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The stock market is one of the best places to invest in.
Stock investing is another common method for those who are interested in growing their money. It is a little more complicated than real estate investing. First, you need to buy shares of stocks from a company. This can be any company that sells or manufactures products or even provides services.
Once you buy a stock from that company, it entitles you to receive a certain percentage of their profit, depending on how many shares you bought. To simplify, if a company has 1,000,000 shares, and you bought 10,000 shares, you earn 1% of the company’s overall profit shares.
There are people who are part of the Board of Directors within the company that is elected into their position. They handle the management of the entire company and decide as a group how much of the profits would be re-invested for the expansion. Based on the profit generated over a given period, they will determine how much each stockholder will get as dividends.
Aside from profiting via dividends, you can also trade the actual stock shares or units. For example, you buy stocks now that are worth $1 each. If their value becomes $2 in the next few months, you can sell them and get a profit. This is a very simplistic example, but that is how stocks trading fundamentally works.
Investing in stocks requires you to study how the stock market works and how stock values are determined. There are several factors that can cause stock prices to go up or down, so make sure you understand what can cause such movement.
There are many advantages to stocks investing that make it more favorable than real estate investments. One reason is that stock investing has been around for over 100 years and is known as a reliable wealth creator. When you own shares of a company, you can earn dividends without doing any work. The good thing about investing in stocks is that not only your dividends may grow over time but the actual value of your shares can also increase, too.
There is also more diversification involved in stock investing. Aside from buying shares from companies, you can also invest in mutual funds. Stock investments are also liquid (whereas real estate is tangible) so it does not tie your money to that single investment for years. You can also leverage the value of your stocks to borrow funds. Yes, you can do the same for real estate, but it will take a lot more work.
On the flip side, stock investing is complicated and requires a lot of study and practice. If you lack an understanding of how the stock market works, you could end up losing money instead of making gains. For example, the credit crisis in 2007 to 2009 resulted in stocks in the market tanking at 50 percent. A lot of investors opted to sell their stocks at when they should have been buying (as the stock’s value was very low).
Another major disadvantage that stock investing has compared to real estate investing is volatility. The price of stocks can fluctuate rapidly and within short periods of time. For example, if you own a $40 stock, it can go down to $10 or $80 within a day or week. You can use your own judgment to sell or buy more shares, depending on the prices at any given moment.
The Bottom Line
There are certain pros and cons with each form of investment vehicle. The only way to determine which one is the best for you is to base it on your investment goal. But for those who prefer something that is low risk but offers a better yield, then real estate investing is your safest bet.
The good thing about investing in real estate is that you have to cover for a one-time initial cost. But when that is done, you can keep earning a profit from that investment for as long as you own it.
Stocks also offer big yield potential, but it might be better suited for investors who will risk their investment. The stock market is highly volatile. If you’re earning high dividends today, you could also lose as much the next day.