India has seen increasing awareness about the importance of investment in the last few decades as the purchasing power of people has risen along with the percentage of the population that is earning.
There are now more investors than ever before, as can be seen in the number of increasing participants in the stock markets, the demand for real estate, mutual fund investments, etc.
Investors mostly invest in one or multiple investment avenues as per their understanding of the specific asset class. However, there is a continued debate when it comes to picking between stocks and real estate. Investors are often confused about which one is better, which can offer better returns, which is a more secure option, etc.
Before deciding on whether to invest in stocks or real estate, investors must understand these in-depth and check out the key differential points to weigh them against each other. Here, we have collated all the information that investors need to know for comparing stocks and real estate.
What is a stock?
- is a type of transferable security
- represents a share or a portion of a company,
- can be bought or sold on a stock exchange or privately
- is also known as equity
An investor who holds a stock is known as a stockholder or shareholder. A stockholder can participate in the entity’s assets and earnings. Stock trading comes under the governance of SEBI, or Securities and Exchange Board of India.
Stocks are considered one of the best investment avenues since they may provide the opportunity to outperform in the long run. Shareholders can also enjoy voting power in the company to the extent of their shareholding. This can be used to prevent any mismanagement in the organization.
What is real estate?
Real estate consists of:
- commercial property,
- fixtures, etc.
Real estate investment involves buying, selling, and construction of property. Property can be residential, commercial, industrial or land. With transfer of the property, one can gain ownership and scope of improvement of land, air, natural resources, etc. With the introduction of REITs (Real Estate Investment Trust), individuals, trusts, or companies can also buy stocks through these to get an exposure to the real estate sector.
What differentiates stocks and real estate investments?
Here are some key points that can help investors differentiate between stocks and real estate and take better investment decisions:
To invest in any real estate property, one has to conduct research online only up to a certain extent. To further explore the available options, one has to physically visit them. For this, an investor has to look at aspects like:
- construction quality,
- guidance values,
- legality of property,
- developer’s credibility,
- construction timeline, etc.
Checking all these factors can require substantial time and effort, both physically and mentally.
Investing in stocks can be easier when it comes to research. To get started, an investor must have a demat and trading account. With some basic knowledge of the stock markets, an investor can easily carry out research online. Over time and with experience, this can be done effortlessly for choosing stocks for investment from the comforts of one’s home. With online platforms, one can trade in stock seamlessly using a smartphone, as long as there is a demat and trading account in India.
Real estate investments are not a onetime-buy, since these require constant maintenance. Real estate involves recurring costs, such as:
- maintaining the property,
- tax payments,
- keeping track of utility costs, etc.
Investors who may have borrowed funds to purchase a property will also have to pay EMI towards the loan. Since this involves interest payment, the final price paid for the property can be far higher than the actual cost. Those who rent out a property may have to face risks such as frequent tenant vacancies, unreliable tenants, reduction in rental rates, etc.
For stock investments, a functional trading and demat account is essential. An investor must set aside some funds for stock investments in order to ensure appropriate financial planning. There are also some charges involved in stock investments. The common ones include:
- brokerage fees,
- transaction cost
- account maintenance fees
However, when compared to the costs involved in real estate, the charges required for maintaining stock investments are negligible.
Real estate investments do not allow sufficient liquidity when compared to stocks. If, for example, an investor wants to sell a property, the processes can be too many, such as:
- listing the property,
- looking for the right buyer,
- keeping a track of market value,
- registration, etc.
Investors who want to sell their stocks could easily do so within a few minutes through their trading account. While liquidating funds in stock markets can be easier than real estate, it is important for an investor to check the timing of liquidation as it may result in losses, if not done at the right time.
Impact of market conditions
Real estate prices are impacted by market conditions. Therefore, an investor may have to wait before liquidating the investment. This means the investment could be held longer than planned until market prices increase. Thus, impulsive buying or selling may not benefit an investor.
Stock investments are equally impacted by market conditions. While stock prices can be highly volatile during turbulent markets, the longer one stays invested in these, the better the chances of higher returns. Long-term stock investments can fetch substantial returns and, just like real estate, impulsive buying or selling may result in losses.
Real estate investment returns may not always beat inflationary tendencies. It can also be difficult to precisely estimate returns since these depend on various factors, such as location, quality, guidance value, etc. If an investor has bought property to reside in, it does not count as an investment, since there will be no monetary benefits from it. Real estate investments are also far more expensive than stocks, as the former require substantial down payments.
Stocks can offer returns in the form of dividends as well as long-term capital appreciation. Dividends are profits that are passed on by companies to investors. Stock investments can also be easily done by any individual, since they do not necessarily require substantial capital.
Investors who are contemplating investment between real estate and stocks must consider their financial goals before making a decision. Apart from goals, an individual’s financial responsibilities, income, risk-taking ability, and return expectations should also be kept in mind while picking between the two.
Yes, real estate investment can cost more than stocks since it requires substantial down payment and could be unaffordable for many investors. Stocks, however, can be bought as per affordability, since different stocks have different prices and investors can choose the quantity of shares to be bought.
To invest in real estate via stocks, one can either explore stocks belonging to real estate companies or invest in REITs (Real Estate Investment Trusts).
Yes, real estate investment can be included in an overall investment portfolio to achieve diversification.
Borrowing to invest in stocks is highly risky and can be done by opting for a personal loan, which can come with high interest rates. Experts often advise against borrowing to invest in stocks since there are higher chances of losses and resulting difficulty in repayment.
As compared to stocks, gauging historical real estate performance can be challenging to measure since it requires one to look at the prices in the area to set a benchmark.