Stock market VS real estate: which is the best investment ?

Real estate and stock market assets are the top investment sectors, but each has its own advantages and disadvantages.

The stock market and real estate both offer investment opportunities to increase capital and generate additional income. However, these two investment methods have completely different characteristics. 

Although real estate still holds the top spot in the hearts of investors, recent data shows increasing interest in stock market investments. Indeed, in France, more than 1.5 million people invested in financial instruments in 2020. This raises the question of whether the stock market is more appealing than real estate. Which is the best investment? 

Investing in the stock market: details of its advantages and risks

The stock market can be as profitable as real estate for long-term investments. In addition, the main advantage is that it is more liquid and more accessible. Investing in the stock market also allows you to invest in the short term to generate regular income. However, this type of investment requires a certain spirit of analysis and a willingness to commit to a certain level of risk.

The advantages of investing in the stock market

Investing in the stock market consists mainly of buying financial instruments and selling them when they have increased in value. This type of investment has the advantage of being accessible with little money. Therefore, there is no need to apply for a bank loan. The length of time the assets are held depends on whether the strategy is long-term or short-term. Moreover, the investor can easily resell them if he finds himself in difficulty. 

Moreover, it is also easy to diversify your portfolio in order to limit the risks. Indeed, you can invest in stocks, CFDs, financial indices, ETF traders, commodities, crypto-currencies, options, bonds and many other assets. In addition, it is possible to use leverage, which allows you to quickly multiply your gains. These can then be reinvested with dividends to target a better return. The low brokerage fees are in favor of stock market investors.

At first, some investors have trouble mastering the stock market. Some platforms like eToro allow them to benefit from comprehensive educational resources, as well as social trading. The latter brings together a community of stock market investors where mutual aid and exchange are particularly conducive to learning and mastering the financial market. Beginners can take advantage of the copy trading feature, to automatically analyze and copy the strategies of the best traders. 

At the beginning, this stage of learning requires availability. However, the amount of time needed will progressively diminish. Moreover, thanks to trading platforms, everything is done online on a PC or mobile phone. Investors can track their positions, buy and sell assets very easily.

Risks and limitations of stock market investments

The values of financial instruments are volatile and there is a risk that their values will decline over time. However, each asset sector has its own economic cycle. It is therefore necessary to diversify your portfolio to include assets of companies that are known for their ability to pay dividends to their shareholders over the years. Diversification should also focus on the location of the issuing companies, as they are subject to the political contexts, laws, currency and regulations of their respective countries. You should also be aware of the taxation of capital gains, which can be significant. 

Investing in real estate: pros and cons

Real estate can be used as a safe haven, and it can also be used to increase the value of savings. Real estate investment is also popular for its ability to generate regular rental income. However, it can be difficult to access and carries specific risks.

The pros of real estate investment

Investing in real estate is primarily about preserving monetary value and building an estate to pass on to your children. Moreover, it is a sector where properties generally tend to gain value in the long term. You can thus generate capital gains when you resell. 

In addition, acquisitions can be dedicated to rental investment, in order to generate regular income. Rental income can cover bank loans at the same time. It is also possible to take advantage of a leverage effect on your real estate investment through short-term furnished rental. 

In addition, rents tend to increase with inflation, allowing you to take advantage of certain tax benefits that can reduce the amount of taxes. The capital gains on the resale can also benefit from tax exemptions.

Real estate acquisitions are tangible assets that will always have value. Real estate portfolios can be easily diversified. Indeed, you can acquire an apartment, a house, a small apartment building, a commercial property, a car park or a mobile home. It is also possible to compose between a seasonal and long-term rental strategy to improve annual returns.

The cons of real estate investment

In order to invest in real estate, it is necessary to have significant capital. This can come from savings, but generally require a bank loan. Repayment can be complicated if you have not invested in the right geographical area or if the cost of renovation is greater than expected. Choosing a property requires taking into account the attractions and development possibilities of the locality. 

In the case of a rental investment, you must also be aware of the risk of rental vacancies and of the property losing its value. In addition, notary, maintenance and co-ownership fees must also be taken into account. It should also be noted that real estate investment is an activity that requires a lot of time, from the search for the property, to renting it out, plus seeking financing.

In addition, real estate has low liquidity. Indeed, the resale period can be very long and in case of emergency, the invested capital will not be available for months, even years. Sometimes, real estate capital gains have a hard time compensating for inflation.

Comparison of stock market and real estate returns

In terms of returns, property investment is generally better than the stock market. This is mainly due to the fact that investing in real estate provides a physical asset that will always be valuable. Buying real estate is less risky than buying stocks or other trading instruments. The latter can lose all their value if the company goes bankrupt or if the markets enter a downward trend. However, the potential for long-term appreciation of a property depends mainly on its maintenance costs, the development of the city and its attractiveness.

However, in terms of income generated, the stock market has proven to be more profitable than real estate in the long run. Indeed, capital gains on stocks and bonds can reach 5% to 6% for a 25-year investment period. In addition, trading also offers great potential for short-term returns. Indeed, some financial instruments allow you to take advantage of a leverage effect that can multiply the invested capital in a few hours.

As part of a short-term strategy, real estate investments can also be compounded with a leverage effect. Here, seasonal rentals and furnished rentals offer very high income potential. However, it must be considered that certain periods of the year are not favourable for these types of rental systems.

The choice is yours ! 

The stock market and real estate both have their advantages. In order to choose, the investor must above all look at their

  • financial profile
  • capacity for risk
  • available time

Although real estate is much less risky, it is generally less profitable than the stock market in the long term. However, it remains appealing. Alongside the capital gain on resale, it can provide regular rental income with  a leverage effect with short-term and furnished rentals.

The stock market offers a wide range of choices of sectors and asset classes. This makes it possible to diversify your portfolio in order to benefit from a safety net. Trading helps you multiply gains through leverage. Stock market transactions have fewer expenses, but are subject to tax, which reduces net profitability.

In terms of profitability, everything depends on the type and location of the property, as well as the financial assets chosen. Preparing a high-quality investment strategy is therefore important. However, you need to remember that stock market investments can be managed online, while real estate is essentially in-person. However, nothing prevents you from combining these two investment opportunities in order to effectively diversify your portfolio.