Real Estate vs Stocks

"stocks are so risky! Better invest in property!!!"

If you have heard the above,  and believed in it, you are as normal as everyone. However, being normal does not mean it is right.

Like it or not, when discussing about investing, many people would compare real estate to stock market, (recently, gold has come into the picture as well, while Mutual funds is a form of investing in stock market).

I am sure you have come across remarks saying, real estate are safer while stock market is like gambling. Is this true?

Comparing Real estate and Stocks is like comparing rice to bread. Can you say Rice is better then Bread? You can't unless you put it into context.

The fact is, every investment vehicle has its own cycles, character and risk. Each plays a function in the economy and each investment yields a certain return for the risk you undertook.

It is important to understand each of them. It is even more important to understand your own risk profile and character. Only then, you can judge which investment tool is best suited for YOU.

Lets take a quick look at some character of this 2 investment vehicle.

Reason for capital appreciation:-

Real Estate:

Supply and Demand dynamics of the location plays a important role in property prices. Since land is scarce, Supply is limited and changes relatively slowly. Hence, Real Estate growth is very much determined by demand. What drives demand for property? Population growth is one factor, business activity is the other. Both real and speculative growth drives demand. This dynamics is very much reflected by inflation. when there is inflation, the demand for goods and services is increasing faster then supply. This goods and services includes property. On the other hand, If there is deflation in a country, you will not see a significant price increase in property as the case in Japan.

This if why, you will hear investment advisers say: "Property is a tool to hedge against inflation." 

Stocks (Shares-rights to own part of a company):

To understand stock market, imagine buying stocks like buying tickets for a concert. 

Just as in the case of Real Estate,  tickets prices are also determined by supply and demand. Obviously, the total supply of tickets is fixed since number of seats in the stadium is fixed. Imagine now, this tickets are allowed to be re-sold on e-Bay. If at anyone time, more people are reselling the tickets on e-Bay then people buying (perhaps due to the unfamous singers), demand is low. Prices of the tickets will become cheaper. If the singers were famous, demand will be high and prices will go up.

end of the day, who is the singer will change the supply/demand dynamics. PR activities like road shows, sensational news of the singer, will also change supply and demand.

Similarly, supply/demand dynamics of a stock is determined by the company behind it. What makes a company appealing enough to create demand for it's shares? It is the ability to make profits  and ability to pay dividends (now or future, actual or forecast). In shorter term, news flow and expectation will change prices rapidly. But in the long term, it is the real ability that counts.
Here is where the difference between Real Estate and stock is. For the property you own, the piece of land and building on it is fix. If rent is RM10 per sq ft, to increase value, you have to wait for the rent to rise since you can't increase land size (unless new land is bought).
However, The ability of a company can change over time and rapidly because it is a business. The same company can have a new range of products, new contracts or improved cost. This will increase the bottom line and value of the company. The tendency to grow this ability can be expected. 

So, investing in stocks is actually getting involved in business and business are a function of a country's economy. Hence, investing in the stock market is actually participating in the economy of the country.



Strength and Weakness:-