2.1 Stock market Vs. Real estate market

​

A market is a physical or virtual place where two or more people meet to exchange goods, services, or assets.

A financial market is a physical or virtual place where two or more people meet to exchange specific types of assets: financial instruments.

 

Since there are many types of financial instruments (see the next chapter), there are many financial markets, depending on the financial instrument exchanged.

Here we will analyze the most known financial market, the stock market, against another market that is generally well known, the real estate market.  The parts that explain the real estate market are taken from my high school thesis, ‘The real estate market.’

 

First of all, they are both asset markets.

An asset differs from goods and services because it is not meant to be consumed, an asset is meant to produce goods and services that can be consumed. A real estate property produces renting, which is a service consumed by renters, a company on the other side, produces any type of goods and services consumed by customers.

 

Secondly, the real estate market is an ‘opaque’ market.

With opaque, we mean that when a real estate property transaction is made, the price involved in that transaction is not shared outside. It remains private between the two counterparts (i.e., over-the-counter).

On the other hand, the stock market is ‘transparent.’ Whenever there is a transaction on a stock between two counterparts, the price that was agreed in the deal is shared with the world by being displayed on tables and graphs that you can see on the internet or on the news (i.e., publicly traded).

 

Often, especially on the most popular stocks, there are so many transactions even within seconds that the price displayed has to be an average of all the transactions made within those seconds.

 

But sometimes, it can also happen that there are no transactions on a stock for a limited period, like hours, days, or weeks. In these cases, the graph keeps showing the last exchanged price, which means the chart remains flat during periods of no transactions pretending the market price has not changed.

 

From this, we understand how fictitious is a company’s market capitalization or a person’s net worth. A company's market capitalization is calculated by multiplying the company's outstanding shares by their market price. Similarly, a person's net worth is found by multiplying the number of shares owned by their market price.

 

Observation. Not all stocks are exchanged in a transparent market. Actually, only a few of them are publicly traded.

Most of the small companies do not meet the minimum size requirement to be publicly traded. In other words, they are too small.

Moreover, some companies that meet the size requirement, so they are big enough, choose not to be publicly traded because it would involve disclosing sensitive business information that would erode their competitive advantage.

So why companies choose to put their stocks on a public stock exchange? To raise money – we will discuss this idea in the next chapter.

 

Observation. A person’s net worth is not composed only by owned shares. The calculation is different depending on the rankings you are checking since they involve different formulas, but corporate shares are the most predominant part.

 

Third, both markets are segmented by product.

The real estate market is segmented into residential properties (rented to private owners) and commercial properties (rented to businesses). While the stock market is segmented into sectors and then further into small-cap stocks, medium-cap stocks, and large-cap stocks, depending on the size of the company's market capitalization.

 

Fourth, both markets are geographically segmented.

For real estate properties is easy. If you bought a house in Italy, the segment market you would be involved in is Italy because that house cannot be moved from the soil.

But when a Chinese investor buys a stock in the New York Stock Exchange from a Brazilian private owner, for regulation reasons, we consider the segment involved as the country where the stock exchange is legally based. In this case, the geographic segment is the USA.

 

Fifth, the real estate market is an ‘illiquid’ market, while the stock market is a ‘liquid’ market.

The degree of liquidity is defined as the time it takes to sell something without getting too far from the market price - if you simply accepted a very low price, you could sell anything quickly enough.

In the real estate market, it takes time to sell a property. While in the stock market, selling a stock on a public market takes much less time. The reason for this can be found in the next difference between these two markets.

 

Sixth, the real estate market is a ‘whole’ market, while the stock market is a ‘divided’ market.

With whole, we mean that you cannot sell a real estate property in pieces. You have to sell it as a whole, which means that the average price of a real estate property is relatively high, thus less accessible.

In the stock market, when you buy a stock, you buy a very small piece of a business, which means that the average price of a stock is relatively low, thus more accessible.

The lower the prices, the higher the liquidity of a market because more players (less wealthy) can participate, which means less time is required to find someone to whom you can sell or buy.

 

Finally, the real estate market is a ‘unique’ market, while the stock market is a ‘common’ market.

Unique because any real estate property is unique, you cannot find two perfectly identical houses.

Common because when you buy a company's common stock, it has the same rights as another common stock of the same company (i.e., standardized). So, it is possible to find more identical assets in the stock market. This makes the stock market even more liquid.