While stock markets across the globe have experienced a turbulent start to 2018, their appeal remains stubbornly high. That’s especially the case compared to other assets such as cash, bonds and property. While those other assets do have appeal at times during the economic cycle, stocks appear to offer the most enticing outlook when it comes to logistics, tax advantages and diversification potential.
Put simply, buying and selling stocks is much easier than performing transactions in other assets. The dawn of the internet has made trading stocks much simpler and easier. It has also brought down the cost of commission, with a low flat fee per transaction enabling small investors to take advantage of the bull market of recent years.
In addition to the ease of opening a new account online and physically buying and selling stocks, they offer greater liquidity than most other assets. For example, there can be a lack of buyers and sellers in the bond market. This could mean that there is difficulty liquidating a position, while the bid/offer spread can be exceptionally wide. Similarly, in property, the buying and selling process takes weeks compared to the mere seconds it can take to buy a slice of a company.
While it is possible to own a portfolio of properties, doing so requires a significant amount of capital. Stocks and bonds, on the other hand, allow an investor to build a diverse range of exposure to a number of global companies. This may help to reduce total risk and provide a smoother return profile over the long run.
The advantage of stocks over bonds, though, is that they allow an investor to share in the success of a business. For example, if an investor buys a slice of a company which goes on to double its profitability, it is likely that a significant rise in its valuation will take place. However, success is not rewarded to the same extent when it comes to bonds, with a doubling in profit simply making it more likely that debt will be repaid.
While tax laws differ in various parts of the world, the common theme is that there are usually tax advantages to investing in stocks. This could be in the form of a tax-efficient wrapper, or a lower tax rate on capital gains as opposed to income tax. Similarly, dividend allowances may be in place and could allow investors to generate a substantial second income from their investments in the stock market. For example in Australia many blue-chip companies like Commonwealth Bank of Australia (ASX: CBA) for example, offer franking credits in addition to cash dividends which will reduce your income tax bill at the end of the financial year.
Therefore, alongside the ability to access a diverse range of global companies with relative ease, stocks seem to be a worthwhile investment. Although they have been volatile in recent months, they appear to offer the most compelling investment potential out of any of the major asset classes for the long term.
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.