Real Estate or Stock Markets – Where to Invest?
Where to Invest – Real Estate or Stock Markets - The Difficult Question?
Where should you invest – Stock Market or Realty
Who wants to keep his money in the bank any more when there are so many investment options to make your money grow exponentially? Well you have to put that minimum amount to those standard post office instruments, provident fund and insurance to save that 30 percent tax allowed by the taxman, and will you be interested in putting even a single penny more than that in those instruments? With its robust and booming economy India has become one of the favorite investment destinations in the world. Almost all sectors are witnessing strong growth, per capita income and spending is at all time high levels. Disposable income in cities is increasing and finding its way to spending and investing. A lot of investment is being pumped in stock markets and real estate. Both are high risk high return markets and have witnessed tremendous growth in the past five years.
The risk factor
The stock markets are definitely more risky than the real estate market and therefore have the potential to give you more returns than the real estate market. You won’t see many multi-baggers in the real estate, I mean to say that in bullish markets stocks are seen to be rising 3 to 4 times in a year where as the increase in property prices is more or less secular in a particular area. But at the same time the stocks can also reduce to half or one third of their value which is rarely seen in real estate. Further you can easily find stocks on upper or lower circuits of 20 percent which means that they can increase or decrease up to 20 percent in one single day and in real estate it takes months to increase or decrease 20 percent. Therefore, of the two we can safely conclude that the real estate investment is safer than the stock market investment.
The information and knowledge factor
As discussed above stock market is a high risk high return game, but if you play it professionally you stand to make a lot of money out of it. Unlike real estate markets stock market investments require a lot of information and in depth knowledge of the companies you are going to invest in. The stock prices are a mirror of the performance of the company which is reflected through quarterly results announced by the company and on the positive and negative news flows. Further these prices also depend on other factors like overall market trend, performance of the particular sector and industry, macro economic factors, global factors and announcements and policies of Government. Therefore, investment in stock markets will require beforehand knowledge of the company you are going to invest in and you will have to keep yourself informed on all other price sensitive factors.
Minimum investment
One good thing about stock markets is that you can make an investment of as low as Rs. 500 and more importantly you can plan your investments like you can put some money every month or you can invest in small tranches and you can have a portfolio of many stocks. In real estate I think a small investment would not make sense and even the smallest investment would not be less than Rs. 10 lacs considering the investment to be made in a metropolitan city.
Transaction costs
The transaction costs of buying a property would be much higher than buying a stock. On purchase of stocks you would be charged a brokerage of about 0.5 percent plus service tax and the security transaction tax (STT) is 0.125 percent. In all you pay about 0.75 percent of the value of security as transaction cost. Whereas in case of a property the agent’s commission would be about 2 percent and the stamp duty on registration of property would be about 8 percent plus some other documentation and incidental charges would take it beyond 10 percent. Since the transaction costs are high, you cannot buy and sell property as soon as you can buy and sell the stocks. Thus you can rotate the money in stock market more frequently than in real estate.
Power of finance
One good thing in real estate investment is that you can buy a property by investing only 10 percent of the total value and rest will be financed by the bank. The interest rate charged by the bank will be fixed and any appreciation over and above the interest rate will be your gain. The finance term can be as long as 20 to 25 years. In the stock markets also margin trading is allowed and further you can buy stock futures in the derivatives market by giving a 20 percent margin of the value of futures. However a position can be built only for a period of one month and can be rolled over every month till the position is settled with rollover costs involved but there is no interest charged. Again, as discussed above, the trading in derivatives market requires a lot of information and knowledge.
The stock exchange advantage
When you have invested in stock markets, you know the exact value of your portfolio on any given day because the prices of stocks are quoted on stock exchanges and you can exit the market any time you decide. Whereas in case of real estate investment you only have an estimate of the value of your property and it takes considerable time to sell the property when you decide to exit the market. Therefore your investments in the stock market are more liquid than in real estate.
Initial allotment
Whether real estate or Stock markets, initial allotment route is always safe. In real estate the allotment is generally made by the State level Urban Development Authorities at prices which are lower than the prevailing market prices, therefore these investments have a very low risk of depreciating. In stock markets also the initial public offerings are made under strict guidelines of SEBI and other governing bodies which control malpractices in the stock markets. Secondly the companies offering equities to public do it at reasonable prices to make the issue fully subscribed. The IPOs are generally listed at a premium and good IPOs can be said to be a safe investment.
Lastly, I would say that investment in stock markets require investment of your time as well. You need to spend time to track your portfolio and the news flows on your stocks. If you have time to invest and if you have an appetite for taking risk, you can go for investment in stock markets and if you just want to invest and forget for a long term, go for real estate investment.