1) Introduction
Investing in Stocks offers several advantages compared to other Asset Classes like Bonds, Commodities, or Real Estate.
This Chapter will explain the advantages of investing in Stocks compared to other Asset Classes.
2) Advantages of Stock Investing Compared to Other Asset Classes
Investing in Stocks has multiple advantages compared to other Asset Classes, which are as follows:
a) Higher Potential Returns
Historically, stocks have provided higher returns over the long term compared to bonds and other fixed-income investments. This potential for growth makes stocks an attractive option for building wealth.
b) Liquidity
Stocks are generally more liquid than other asset classes. You can buy and sell stocks quickly and easily on the stock market, providing flexibility to access your money when needed.
c) Passive Income from Dividend Payments
Many Public Companies pay a Dividend, which are derived and paid out from the company’s profits and distributed to shareholders usually once every Quarter. Investors benefit from investing in Stocks mostly as a result of Share Price Appreciation. However, dividends provide a second benefit from Stock Investing by providing an Investor a source of Passive Income which can provide a steady stream of secondary income.
d) Diversification
The stock market offers a wide range of companies across various industries and regions. This allows investors to diversify their portfolios, spreading risk across different sectors and reducing the impact of any single investment’s poor performance.
e) Inflation Hedge
Stocks have the potential to outpace inflation over time. As companies grow and increase their earnings, their stock prices can rise, helping to preserve and grow your purchasing power.
f) Capital Gains Derived from Economic Growth
Investing in stocks allows you to participate in the growth of the economy. As companies expand and innovate, their stock prices can increase, providing capital gains to investors.
g) Accessibility
With the advent of online trading platforms, investing in stocks has become more accessible to individual investors. You can start investing with relatively small amounts of money and gradually build your portfolio.
h) Tax Advantages
In some regions, long-term capital gains from stocks may be taxed at a lower rate compared to other forms of income. Additionally, certain tax-advantaged accounts, like IRAs or RRSPs, can help you grow your investments tax-free or tax-deferred.
3) Mitigating Stock Asset Class Volatility & Risk Compared to the Minimal Risk & Volatility of Other Asset Classes
While stocks offer multiple advantages as referenced herein above, it is important to remember that Stock Investing has higher Volatility and Downside Risk compared to some other Asset Classes. Balancing an Investment Portfolio with a mix of different Investment Asset Classes can help mitigate Stock Portfolio Risk.
4) Advantages of Stock Investing Compared to Real Estate Investing
Investing in stocks and real estate both have their unique advantages, but Stock Investing has some key benefits compared to real estate investing. These advantages are as follows:
a) Liquidity
Stocks are generally more liquid than Real Estate.
Selling Real Estate takes a significantly longer period of time compared to selling Stock, resulting in a lack of access to money when needed.
Since stocks can be quickly and easily sold on the stock market, stock investing provides quick and flexible access to money when needed.
b) Lower Entry Costs
Investing in stocks typically requires less capital upfront compared to real estate, which often involves significant down payments and closing costs.
c) Diversification
The stock market investing offers a wide range of companies across various industries and regions, allowing for easier Diversification.
Stock Market Diversification can help spread risk and reduce investment Risk compared to the impact of any single Real Estate Investment which incurs poor profit margin resulting from any number of factors including:
• Rental Income that is less than inflation.
• Rental vacancy resulting in income loss and reduced profit.
• A bad tenant that causes property damage resulting in higher operating cost due to repair or replacement of physical assets or property
• Annual property tax increases that exceed the annual rental rate increase resulting in reduced profit margin.
d) Ease of Management
Stocks do not require the same level of management as real estate. A Stock Investor does not have to deal with property maintenance, repairs, tenants, rent collection, finding and vetting a new tenant, or other issues that come with owning physical property.
e) Potential for Higher Returns
Historically, stocks have provided higher returns over the long term compared to real estate. This potential for growth makes stocks an attractive option for building wealth.
f) Tax Advantages
In the United States and Canada, long-term capital gains from stocks may be taxed at a lower rate compared to other forms of income derived from a Capital Gain. Additionally, certain tax-advantaged accounts, like IRAs, 401K’s, or RRSPs, can help you grow investments and accrue the wealth of an Investor on a tax-free or tax-deferred basis.
g) Accessibility
With the advent of online trading platforms, investing in stocks has become easily accessible to individual investors compared to acquiring Real Estate. An Investor can begin investing immediately, with a relatively small amount of money compared to investing in Real Estate.
5) Mitigating Stock Asset Class Volatility & Risk Compared to the Minimal Risk & Volatility of Real Estate Investing
While Stock Investing offers many advantages compared to Real Estate Investing, it is important to remember that Stock Investing has higher Volatility and Downside Risk compared to investing in Real Estate. Balancing an Investment Portfolio with a mix of different Investment Asset Classes can help mitigate Stock Portfolio Risk.
6) Advantages of Stock Investing Compared to Investing in Commodities
Investing in stocks has several advantages compared to investing in Commodities; these benefits are summarized as follows:
a) Passive Income from Dividend Payments
Many Public Companies pay a Dividend, which are derived and paid out from the company’s profits and distributed to shareholders usually once every Quarter. Investors benefit from investing in Stocks mostly as a result of Share Price Appreciation. However, dividends provide a second benefit from Stock Investing by providing an Investor a source of Passive Income which can provide a steady stream of secondary income.
Commodities do not provide any Dividend Income or source of Passive Income.
b) Potential for Capital Appreciation
Stocks have the potential for significant capital appreciation as companies grow and increase their earnings.
Commodities are more influenced by supply and demand dynamics and may not offer the same growth potential as a Stock investment.
c) Liquidity
Stocks are generally more liquid than Commodities. An Investor can buy and sell Stocks quickly on the stock market; whereas Commodities often require trading through futures contracts or other less liquid markets.
d) Ease of Management
Managing a stock portfolio is typically simpler than managing commodities, which may require more specialized knowledge and monitoring of global supply and demand factors.
e) Tax Advantages
In Canada, the taxation of commodities and stocks can differ significantly.
Overall, capital gains from stocks generally enjoy more favorable tax treatment compared to the potential full taxation of profits from commodity trading.
Capital gains from the sale of stocks are taxed at a favorable rate of 50%. The 50% Capital gain that is derived from a Stock Investment is included in an Investors taxable Income, which is then taxed at that Investor’s marginal tax rate.
The taxation of commodities is more complex. If commodities are traded as a component of the business, then the profit derived from a Commodity Investment is taxed at 100% as business income. Additionally, commodities may be subject to Goods and Services Tax (GST) or Harmonized Sales Tax (HST) depending on the type of commodity and the nature of the transaction.
However, if a business Invests in a Commodity as an Investment only, and that investment is deemed to not be a component of the business itself, then only 50% of the Capital gain is taxable (similar to Stocks).
Dividend Income from Canadian Companies are taxed at a lower Rate due to the Dividend Tax Credit.
The Federal Dividend Tax Credit rate is 15.01% for “Eligible Dividends” and 9.0301% for Non-Eligible Dividends as at 23 September 2024.
Generally, if a Commodities Trade is considered by the Canada Revenue Agency to be a business activity, the profit will be taxed at a higher rate compared to a Capital gain from Stocks.
The United States does not have a dividend tax credit like Canada. Instead, the U.S. tax system distinguishes between qualified and nonqualified (ordinary) dividends.:
Qualified Dividends: These are taxed at the lower capital gains tax rates, which are 0%, 15%, or 20%, depending on an Investor’s taxable income and filing status.
Nonqualified Dividends: These are taxed at ordinary income tax rates, which can be as high as 37%.
Additionally, US dividends received by non-residents, including Canadians, are subject to a 15% withholding tax as at 23 September 2024.
7) Advantages of Stock Investing Compared to Investing in Bonds
Investing in Stocks compared to Bonds offers several distinct advantages; these benefits are summarized as follows:
a) Higher Potential Returns
Historically, stocks have provided higher long-term returns compared to bonds. This potential for growth makes stocks an attractive option for building wealth compared to Bond investing
b) Ownership and Dividends
Many Public Companies pay a Dividend, which are derived and paid out from the company’s profits and distributed to shareholders usually once every Quarter.
Investors benefit from investing in Stocks mostly as a result of Share Price Appreciation. However, dividends provide a second benefit from Stock Investing by providing an Investor a source of Passive Income which can provide a steady stream of secondary income.
Bonds do not provide any Dividend Income or source of Passive Income.
c) Inflation Hedge
Stocks have the potential to outpace inflation at a greater rate over time compared to the Return or Yield from a Bond Investment.
As companies grow and increase their earnings, their stock prices can rise, helping to preserve and grow an Investor’s purchasing power. Conversely, a Bond’s return is based on its Yield, which is generally at a fixed or predetermined Rate over a defined period of time. Consequently, the rate of Return or Profit derived from a Stock Investment is potential greater compared to the Yield or rate of Return from a Bond over the same period of time.
d) Liquidity
Stocks are generally more liquid than bonds. An investor can buy and sell stocks quickly and easily on the stock market, providing flexibility to access their money when needed.
Conversely, a bond has a maturity date which is the date at which the principal amount of the bond is to be paid back to the bondholder.
Interest payments to bondholders also known as coupon payments are made typically on a regular schedule. The most common interest payment schedules are:
• Semi annual – interest paid twice a year until maturity.
• Annual – interest paid once a year until maturity.
• Quarterly – interest paid four times a year until maturity.
• Monthly – interest is paid every month until maturity. The specific schedule for interest payments is set out in the Bonds’ terms when the Bond is issued.
Generally, a Bondholder generally is not able to be redeem a bond prior to maturity if access to cash is required by the Investor, without incurring a substantial penalty for doing so. Consequently, capital invested in a bond is not liquid until the maturity date of the bond.
e) Growth Potential
Stocks offer the opportunity for capital appreciation as companies expand and grow their Revenue. Bonds, while more stable, typically provide lower returns compared to Stocks, and are better suited for risk-averse investors.
f) Diversification
The stock market offers a wide range of companies across various industries and regions, allowing for easier diversification. This can help spread risk and reduce the impact of any single investment’s poor performance; thereby potentially exceeding the Yield or Return that accrues to an Investor from Bond Investments.
8) Mitigating Stock Asset Class Volatility & Risk Compared to the Minimal Risk & Volatility of Bond Investing
While Stock Investing offers many advantages compared to investing in Bonds, it is important to remember that Stock Investing has higher Volatility and Downside Risk compared to investing in Bonds. Balancing an Investment Portfolio with a mix of different Investment Asset Classes can help mitigate Stock Portfolio Risk.
9) Conclusion
Stock investing offers many significant advantages compared to investing in other asset classes such as real estate, commodities, and bonds.
However, it is important to recognize that while Stock investing offers many advantages compared to investing in other asset classes, generally Stock investing has higher volatility in downside risk compared to investing in other asset classes. Stock investment risk can be mitigated by ensuring that an investment portfolio has a mix of different stocks which represent different asset classes. In the alternative, s’s tock investment Risk can be mitigated by ensuring the investment portfolio is balanced with a mix of different asset classes.