Whether you want to invest in a property (or multiple properties) or in shares will largely depend on your needs and goals. Do you need stability or are you able to handle risk? How much of your own time are you willing to invest? How much money do you have to invest in an advisor? Here is a basic rundown in property and stock market investment, plus the pros and cons of each.
Investing in properties: an introduction
In Australia, property investment is usually considered a safer and more traditional way of growing your wealth. While purchasing a property takes a large chunk of money for the deposit, you could also earn a significant—and constant—source of income through rent, if you opt for that route. Additionally, making principal repayments on your mortgage in the long run will give you equity in your house, which you have the potential to use toward buying more properties and therefore expanding your investment portfolio.
You can even add more value to your home by making renovations. In many cases, the simple passage of time could also earn your property more value. Plus, investors will likely be able to earn significant tax benefits. The tangibility of an asset that you can see and touch, a brick-and-mortar home, also adds considerable value especially to first-time or inexperienced investors. Nothing about an investment in property should be taken for granted.
While the benefits of investing in properties abound, it should also be acknowledged that being a property owner can be quite challenging. Major costs such as mortgage repayments, expenses, and maintenance do start to add up—and the income you earn from rent may not cover them all. If you do not have a tenant, you could find yourself in a serious situation financially.
The advantages or disadvantages of investing in properties
There are many advantages of investing in properties. One is that it is often less volatile than other investments you could make. In other words, an asset is considered less of a risk when it is more stable. This is especially true compared to investing in the stock market, for instance, where the value fluctuates often.
Another advantage of property investment is that if you purchase a property in a location with a high demand for rentals, the value will likely increase. This also means that if you have a reliable tenant or tenants, the rental income you get from your property will likely cover most if not all of the mortgage.
It is important to understand, however, that there are also plenty of disadvantages to investing in properties, one being that it is often less flexible than investing in the stock market. Another disadvantage is the cost, such as having to pay lenders mortgage insurance if you haven’t saved a 20% deposit, plus additional costs for maintenance and insurance. This problem can become untenable in the event that you do not secure a reliable tenant, meaning you will have to find the funds to pay the mortgage and/or maintenance elsewhere.
An introduction to stock market investing
Investing in the stock market—the buying and selling of shares, bonds, and exchange-traded funds—is conducted through the Australian Securities Exchange, or ASX, usually through an online broking service or a broker. While brokers can make recommendations to you and/or do the trading for you, you can ultimately advise them on what you want to buy or sell.
As mentioned, you can also go through an online trading platform, which allows you to conduct the trades yourself. Going this route, you will be charged “brokerage” for either a set dollar amount or a percentage of the trade’s value. Larger transactions are typically charged brokerage as a percentage of the value while smaller transactions are often charged a set dollar amount.
Purchasing shares makes you a part owner of a company—a shareholder—and occasionally companies will afford you other benefits as well as pay dividends. Like other markets, there are buyers, sellers, and sell orders that go through brokers. It is the job of the broker to match orders and receive the best price for the buyer and seller. The bid price is the price that you want to purchase the share at. The offer price, on the other hand, is the price that the seller wants to sell the shares at.
The advantages and disadvantages of investing in the stock market
As with property investment, there are advantages and disadvantages to investing in the stock market. One obvious benefit is that it is easier to buy and sell shares than it is to buy and sell a house, since preparing for the sale of a property can take a lot of time—and a lot of fees. Another two advantages are that there are usually lower upfront and ongoing expenses when you build a share portfolio, and you can also diversity your shares across a variety of different industries.
One major disadvantage is that your investments are dictated by the stock market—which is notoriously unpredictable. For these reason (and others) investments typically come with a much greater risk, with even so-called safe stocks capable of plummeting. Finally, remaining informed can be all-consuming, meaning that you will either have to pay with your time or by investing in a broker.
