Real Estate vs. Stocks
What are Stocks?
Stocks are shares of ownership in a company. Stocks are most commonly sold at the company level to acquire more capital and assist in a company's growth. Those who purchase stock do not own the company, they own shares of the company. The most common example of stocks being bought and sold occur through public companies on the stock market.
Stock prices are determined by traders. Traders closely examine companies at the performance level to determine whether or not to buy or sell shares of stock. Traders tend to bid up stock prices if a company’s performance shows growth. When this happens, bid prices go up because there are more buyers in the market for that stock, and as a result the company stock will increase in value. If a company’s performance is poor, traders will be more inclined to sell the stock. When this happens, the value of the stock will decrease as well as the value of the company.
There are two major ways in which stockholders can make a profit:
- Buy low, sell high. This is where stockholders sell stock for a higher price than they originally purchased it for. The difference is the available profit after fees.
- Collect dividends. Companies will divide up a portion of the company’s earnings to pay out shareholders. This payout usually occurs on a quarterly basis.
Real Estate vs. Stocks Comparison Chart
INVESTMENT ASSET CLASS
High Cash Yield
Real Estate vs. Stocks Comparison Details
Is a Stock a Hard Asset?
Shares of stock are not tangible or physical items of worth owned by an individual or a corporation. They are not considered hard assets.
Are Stocks affected by Inflation?
Inflation is the rise in price of goods and services, which reduces how far the dollar can go. Typically, you will see greater volatility in stock movements in high inflation economies. This can be perceived as both good and bad.
Do Stocks have a High Cash Yield?
Free cash flow yield is the ratio of free cash flow to the business' market capitalization but "Cash on Cash Yield" is slightly different. Stocks can provide high cash yields but are usually described as "Free cash flow yield" wheras "Cash on Cash Yield" is typically used to describe real estate or income-producing investment stocks.
Can Stocks be Leveraged?
Yes, stocks can be leveraged, but If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would’ve been if the investment had not been leveraged – leverage magnifies both gains and losses.
Are there Tax Advantages from owning Stocks?
If you were to purchase shares of stock and hold them for a year or more, you would be looking at a tax rate of 15% upon selling. Held under a year, you’d pay the regular income tax rate according to your tax bracket upon selling. High income tax payers, which are single people with an annual income of $400,000 and $450,000 for married couples, pay a 25% tax rate at the time of selling after a 1 year holding period. If receiving dividends, companies tend to issue dividends out of the earnings made after taxes, so for the investor a preferential tax rate of 15% is typically owed.
Do Stocks build Equity?
Stocks absolutely build equity, and as long as your invested directly in them, versus through an IRA or mutual fund, you can easily sell your stocks to receive cash equity for their value.
Risks of Investing in Stock
Stock market investors depend on a healthy financial market. Heightened market risk is apparent in crashes and recessions like that we saw most recently in 2000/2001. All investors are affected in a stock market crash. Depending on how much is invested at the time of the crash, some investors may be affected more than others. Independent of the overall market however, an individual stock portfolio may decrease in value, causing an investor to lose on their investment. This type of risk can often be mitigated, but is contingent upon stock market knowledge.
Some consider real estate a safer investment class when compared to stock market investing. Stock market investing consists of buying shares of ownership interest in a public company that can be traded on financial markets. Real estate investing consists of purchasing tangible property. Stocks are more liquid than real estate in that they can be converted into cash quickly when an investor wants to sell. Either way, it is crucial you understand the housing market if you choose to invest in real estate, and the stock market, if you choose to invest in stocks.