Although both stocks and real estate investment trusts (REITs) are listed on the stock market, there are differences between the two.
REITs are predominantly trusts that invest in properties and earn income through rentals, leases and sales of their assets.
Stocks, on the other hand, can be any kind of business, ranging from banks to technology to supermarkets.
Stocks are not regulated by the same restrictions that are imposed on REITs and therefore have more leeway to conduct business and seize opportunities that REITs may not be able to.
However, at the same time, because of this, stocks can sometimes be a riskier investment.
Here are some key advantages and disadvantages of investing in stocks.
What are Stocks?
Stocks are shares of ownership of a company.
Therefore, by purchasing a stock, you are essentially buying a part-ownership of the underlying business.
With that, shareholders are entitled to benefits such as dividends and voting on corporate issues.
The value of the company can appreciate – or depreciate.
The change in prices in the long term is due to fundamental changes in a business’s profitability and in shareholders’ equity.
But prices can also fluctuate daily based on investor sentiment.
Advantages of Stocks
Many different types of stocks to choose from
Stocks span virtually every sector of the economy, such as finance, technology, healthcare and consumer goods.
This breadth allows investors to tailor their portfolios to match their specific investment goals and risk appetite.
Many companies are also highly diversified themselves and operate in multiple countries.
Stocks are not restricted by regulations
Unlike REITs, stocks are not restricted by how much they must pay out in dividends or how much leverage they can use.
This means they have the flexibility to choose to retain their earnings to grow or to increase borrowings to expand their business.
For instance, a leading banking blue chip like DBS Group Holdings (SGX: D05) offers exposure to Southeast Asia’s expanding financial sector while maintaining the flexibility to reallocate earnings into strategic tech investments or shareholder returns.
That said, if management is not prudent in the way it manages its finances, a company may end up taking on too much risk.
May have better growth prospects
Stocks that operate in high-growth industries are more likely to grow at a faster rate than REITs.
A telecommunications giant like Singapore Telecommunications Ltd (SGX: Z74), or Singtel, demonstrates how a well-established Singapore stock can tap into regional markets and emerging sectors, such as data centres and digital services, to unlock capital appreciation.
By contrast, property is usually a slow and steady investment that does not appreciate quickly.
Disadvantages of Stocks
Dividends are not predictable
Unlike REITs, stocks have the leeway to increase or decrease their dividends as and when they please.
REITs are required to pay out at least 90% of their taxable income to unitholders.
As such, REITs have a more predictable payout.
Stocks are more volatile
Historically, stocks have been more volatile than REITs.
This is likely because REITs have a more predictable cash flow than most stocks.
A clear example of stock cyclicality is Singapore Airlines Limited (SGX: C6L), which reported record losses during the height of the COVID-19 travel restrictions, before staging a dramatic financial turnaround as global travel rebounded.
Stocks are not as regulated by the exchange
REITs need to meet many criteria to qualify as a REIT.
Stocks, on the other hand, do not have as many requirements.
This makes some stocks inherently riskier investments.
Get Smart: Navigating Stocks and REITs
Stocks and REITs each bring unique advantages to a portfolio, and holding both provides broader diversification across different asset classes.
Before investing, it’s crucial to understand how they differ.
This will help you harness both assets for long-term wealth creation and steady income.
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Disclosure: Renee W. does not own shares of any stocks mentioned.
