Introduction
India primarily has two types of investors, those who invest in tangible assets such as property and gold, and those who invest in intangible financial assets such as equities, bonds, mutual funds etc. Today we will compare one each from tangible and intangible investments—gold and equities. Both assets are extremely popular, one being a commodity while the other denoting part ownership of a company. We will compare both asset classes, their unique characteristics, based on which you can decide which asset you should invest in.
About Gold
Gold is a tangible commodity that is often regarded as a hedge against inflation. One of the most loved and precious metals, it is mostly utilised for making jewellery. However, gold is also considered a great financial asset that is traded for its intrinsic value.
If you want to invest in gold, there are a variety of alternative possibilities beyond buying gold as a commodity. You can invest in an exchange-traded fund (ETF) that tracks the price of gold, gold mutual funds, digital gold, and sovereign gold bonds.
There is a direct correlation between the overall performance of your gold assets and the cost of gold, if the price of gold goes up, the performance of your financial assets will improve, and vice versa.
The returns on gold are consistent but not particularly high. Prices are contingent upon demand, supply, and geopolitical and economic circumstances.
Gold is perceived as a low-risk investment. During periods of economic uncertainty, it is considered a safe asset, which gets a boost in value in such times. However, investing in physical gold does not yield dividend returns. As a result, gold is a risky investment since investors rely more on price growth than they do on stocks.
Gold has a solid inflation-defying hedge. Usually, its worth increases as the value of money decreases.
About Equities
Equity, commonly known as stocks, are intangible investments that represents the shares you own in a company.
An equity investment is made when you buy stocks in a company. Equity is the aggregate sum of funds that you, as a shareholder, are entitled to receive upon the liquidation of a company's assets and the repayment of all its debts.
The company in which you have invested will figure out how your equity investments turn out. You stand to gain financially if those businesses do well; a rise in stock prices represents increased value. Your stock investments can go down the drain if these businesses underperform.
Equities may generate substantial returns over the long term; however, they are subject to considerable volatility. Growth, revenue, and economic circumstances are all factors that influence the organisation's performance.
Equity trading has a risk factor to it. Changes in market sentiment, economic conditions, etc can all have an impact on a company’s stock values.
If companies do well, investors can earn more from their investments over time than inflation can eat away at.
In Comparison:
In times of economic instability, gold is usually a safer investment than stocks. When businesses are having difficulty during a recession, people begin investing in gold because they believe it to be a safe investment. This leads to an increase in the price of gold. If you are looking for a way to invest during times of economic instability, gold is a good option to explore. During periods of economic growth or stability, the performance of equity markets is positive. On the other hand, during the period of economic expansion, it is more prudent to invest in stocks rather than gold.
Should you choose to invest in real gold, you should be very certain of the quality of the gold. You might have to sell it for a low price if it's not the best standard. To add insult to injury, gold does not produce returns in the form of dividends. As a result, investors are more dependent on price appreciation in the case of gold than they are in the case of shares, which makes gold a riskier asset.
The return on equity investments has been significantly larger than the return on gold investments over a significant amount of time. As a result, equity investments offer a more effective buffer against inflation than gold does.
Trade in Gold ETF Instead of Gold as a Commodity
Exchange-traded funds (ETFs) that track the price of domestic physical gold are known as gold ETFs. One unit of an ETF is one gram of gold, which is stored in paper or demat form and backed by 99.5% pure gold bar.
The process of investing in a gold ETFs is as simple as mutual fund trading or buying a stock through your broking account. This provides a hassle-free method of investing in gold without the need to manage its physical composition.
By trading gold ETFs on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), you can buy or sell units at any time during market hours, making it similar to trading in equities.
Conclusion
Whether you should invest in gold or stocks is dependent on your financial goals, level of comfort with risk, and understanding of the market. Gold is an excellent investment option for those who are looking for security, a hedge against inflation, or diversification of their portfolio. Equity trading has the potential to yield considerable returns if you have a higher risk appetite and are looking for growth over a longer period.
A well-balanced portfolio will often consist of both gold and stocks to get the best possible risk-adjusted returns.
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