Investing guides
Property vs Stocks: Which is the better investment?
Property has always been a popular investment, but what about the stock market? We explore these two options in detail to help you decide which is right for you.
Investing in property or the stock market each offer their own benefits and risks.
Both choices cater for different types of investors with different financial goals.
Let’s look at the pros and cons of each.
Differences between investing in property and stocks
Nature of the Assets
Property: Real estate is a tangible, physical asset. Investing in property means owning a piece of land or a building. This appeals to investors who prefer owning something physical. It can provide a sense of security and control. Property can generate rental income or be used for business or personal use.
Stocks: Owning stocks means holding a fraction of ownership in a company. Stocks are intangible and represent a claim on part of a company's assets and earnings. The value of your investment is tied to the performance of the company and the broader economic environment. Stocks can provide dividends and capital gains if the stock price grows.
Value
Property: The value of property depends on its location, condition, and market demand. Property value can also be increased through renovations.
Stocks: The value of a stock relies on a company's financial performance, management decisions, and economic conditions. Stock prices are also affected by investor sentiment and can be volatile over short periods. The price at which a stock trades represents the market’s consensus on the value of the company’s future earnings and growth prospects.
Liquidity
Property: Real estate is illiquid due to the time and effort required to complete a sale. Selling a property involves many stages. You need to list the property, find a buyer, complete due diligence, and finalise the sale through legal channels. This process can take several months or even years.
Stocks: Stocks are generally very liquid, especially those listed on major stock exchanges. Investors can buy and sell shares quickly through brokers with settlement typically occurring within a few days - this is a benefit when the market is volatile.
Acquiring and Managing
Property: Buying property is a complex process that can involve estate agents, solicitors, and surveyors. Managing property can be labour-intensive, particularly if it's being rented. Property management includes regular maintenance, dealing with tenants, and sticking to legal and regulatory requirements.
Stocks: Investing in stocks can be as simple as opening a brokerage account and making purchases through the investment platform. This can be done without the need for intermediaries. Investors can choose to invest actively (selecting stocks and timing the market) or passively (investing in mutual funds or ETFs that track a market index or investment theme). This flexibility in management style can appeal to both hands-on and hands-off investors.
Should you invest in property?
Investing in property could potentially secure your financial future, but it's worth researching the pros and cons before committing.
Pros
It's a stable investment: Property markets are less volatile than the stock market. While it might take longer to buy and sell, investing in property has, historically, generated positive returns. According to the UK House Price Index, the average annual house price growth in the UK over the past 20 years has been around 4-5%, though this will vary significantly by region.
Consistent income: Most property investors buy to rent. This gives them a passive income which can help you pay off your own mortgage. If you buy and rent enough properties, the income could fund your whole lifestyle.
Property is a physical asset: Physical assets will always have an inherent value because of the need for housing. You can also either live in it or rent it out.
Cons
Hidden costs: If surveys don't reveal damage, or if a tenant causes damage, you could face a hefty repair bill. If you can't find a tenant, you'll end up paying for everything yourself on top of a mortgage.
Prices might not rise: Not all properties grow in value. If your investment flatlines or reduces while markets are volatile, you could owe more than the value of the property.
It's expensive to get started: Deposits, stamp duty, solicitor’s fees, estate agent fees... it all adds up.
Tough to sell: Unlike stocks and shares, you can't quickly take you money out of property if you need it. You can re-mortgage to release equity, but even this takes time.
Should you invest in the stock market?
Investing in the stock market comes with many attractive benefits. But it's worth understanding the risks as well.
Pros
It's easy to invest: Online trading platforms such as interactive investor give you direct access to the stock market. Simply open an account to get started, even without financial expertise. And we've made investing even easier by launching the new ii Managed ISA, so you can choose whether you want your investments actively or passively managed.
It's your money, you chose what to invest: Unlike property, you can invest as little or as much as you want to suit your level of risk. Whether it's in shares or less risky investments like bonds and gilts, the stock market accessible to everyone, regardless of their economic background.
It can beat cash: When the economy grows, stock prices tend to rise. Although not guaranteed, investing in the stock market has historically driven much greater profit than keeping money in a savings account.
Investments are liquid: This means you can buy, sell, transfer or withdraw your money quickly. Investors can adapt their portfolio to changing conditions and manage their exposure to risk.
Tax wrappers help you keep more: Investing in a Stocks and Shares ISA gives you tax benefits including not paying tax on dividends or capital gains. A Self-Invested Personal Pension (SIPP) gives you further tax relief on contributions. If you invest in the AIM market, some investments are free of Inheritance Tax (IHT) in certain circumstances.
Cons
It's risky: the stock market is known for being volatile. Stock prices rise and fall due to economic and company performance, as well as exposure to global shocks. Investors need to understand the risks before investing. If you are not sure about an investment, seek advice from an independent financial adviser.
Research takes time: Investors need to spend time researching before investing. Companies publish financial reports, stock markets publish news, experts publish opinions, all this can help investors understand the state of the market and how risky their investment is. Once money has been invested, investors need to monitor performance and be ready to act should markets become turbulent or circumstances change.
It can be expensive: Platform costs, management charges, foreign exchange fees, stamp duty, the costs soon add up. Most providers charge a percentage fee that grows with your investment - at ii we charge low flat fees, potentially saving you thousands.
Which is the right type of investment for you?
Both property and the stock market provide good long-term investment strategies, if you’re willing to accept the risks and ride out any volatility.
Investing in stocks offers more immediate access to the market, and more flexibility over what you want to invest in.
If you still can’t decide, then investing in the stock market means you can invest in property through Real Estate Investment Trusts (REITs).
Learn more about investing
Learn how to make the most out of your investments with our useful guides.
