Gold Investment

Gold vs Stocks – Understanding Their Features & Differences as An Investment

8 Mins read

Traditionally, India has enjoyed a very special relationship with gold – one that goes beyond seeking gold as mere means of investment. Culturally and traditionally, Indians have put gold on a pedestal that almost makes it an essential part of people’s lives. It has been used as ornaments, as wedding gifts and even as savings for children’s weddings. Speaking in terms of investment, Indians have for long chosen to invest in physical assets. And gold was key as it was an investment and had sentiments attached to it. On the other hand are the investments in stock market which give high returns but are risky. In this article we have discussed the features, differences and implications w.r.t. gold vs stocks investment types

Winds of change

As the number of people embracing technology increases on a daily basis, it has impacted the way investments are made today. Investors now are gradually shifting away to financial assets and digital gold, away from other physical investments.

The world of investments can be very confusing. Afterall, it is one’s hard-earned money. There are a lot of options in the market – different instruments, each with its own unique set of advantages as well as drawbacks. While a regular fixed-deposit account may be considered as a safe form of savings, it does not offer great returns. Hence, people turn to investments such as gold, stocks, mutual funds, etc. Among these, gold is a very simple and straightforward investment option – in its physical or digital form, gold can easily be bought or sold and with minimal market knowledge.

Wish to become an investor but confused between stocks and gold? Let us help you out.

Here are some of the pros and cons of gold vs stocks


1) Stability and Growth:

Owing to the fact that gold has been a form of investment for ages, investors view it as a safe haven in times of crisis. Stocks, which provide returns based majorly on corporate earnings, take advantage of growing economies. When there are more jobs, people’s spending power increases as there’s more disposable income. This knocks the demand-supply pendulum into motion, thereby driving up profits for corporates and in turn, filling the pockets of stockholders.

gold vs nifty index price for last 10 years, from 2010 to 2020

Historical returns of Gold and Nifty. There were 6 instances (2010, 2011, 2012,2016, 2018, 2019, 2020) where Gold has given higher returns than Gold. This shows that Gold can be a good choice to balance the portfolio performance.

However, it is crucial to note that in times of volatility or in the event of a stock market crash, value of investments can fall drastically. This is unlike gold, which enjoys greater stability. Gold, apart from being a crucial form of investment, is also a key component in many industries that fuel our world. It is therefore highly unlikely for gold prices to crash
tremendously anytime soon.

2) Buy/Sell:

The shift in investment towards financial assets can also be attributed to the many companies that offer services such as buy/sell stocks, analysis, etc. to consumers. Today, stocks are easily purchased and sold through apps, eliminating the need for pesky middlemen.

Similarly, gold investment has also seen a massive makeover, with many companies offering consumers the ability to invest in digital gold. While it is easy to go to a jewelry store and buy physical gold according to one’s needs, consumers also have the option of buying digital gold online and then avail its delivery.

While gold can be purchased with minimal paperwork, a number of documents and other details are required before one can make a purchase in stocks.

When it comes to selling, again gold is the easier option. Gold can be directly sold at the prevailing rate at a jewelry store or in the case of digital gold, sold online and the sale proceeds will be directly deposited in the consumer’s bank account. Stocks can also be easily sold online. However, this sale can only be done from 9:15 am to 15:30 pm. The final value is dependent on the stock’s closing price and it can take a couple of days before the sale proceeds are deposited in the consumer’s bank account.

3) Other Costs:

In order to create a trading account, most trading platforms/brokers charge a registration fee, apart from an annual maintenance fee. And based on the volume of stocks purchased, a transaction fee may be charged from the user. These days, many online platforms are waiving such fees in a bid to attract new users.

When we think of buying gold, one of the first thoughts that occur are regarding making charges. Making charges are levied by the jeweller on ornaments and other gold products based on the type and level of intricacy of the design. These making charges cannot be recovered by the consumer and is therefore deemed as a loss. However, there are no such charges on buying gold digitally.

4) Market Knowledge/Research:

You must have heard the phrase “Mutual funds are subject to market risks. Please read the offer documents carefully before investing.” This can apply to stocks as well as one needs to have a basic understanding of the market in order to earn returns on their investments. There is a constant need for tracking and analysis if one needs to maximize their profits via stocks.

In the case of gold, not much research or in-depth understanding is required. As far as trade of gold is concerned, the buyer/seller can just check the daily value/price of the yellow metal and proceed with the transaction accordingly. The most important thing to note when trading in gold is to enquire about the authenticity of the jeweller and the business in order to prevent forgery.

Buyers also need to be wary when paying making charges as some jewellers may charge exorbitant rates.
Save on unwanted making and transaction costs. Switch now to digital gold.

5) Regular Returns:

A key differentiator which sets stocks a level apart from gold is regular returns on investments. Stocks, unlike gold, offer some form of returns to the investor in the form of interest, and even dividends.

Gold’s value is entire. It does not offer any intermediate returns or benefits and realises its true potential only when it is sold/mortgaged.

6) Flexibility:

One of the limitations of physical gold is that its value can only be measured entirely, particularly if it is an ornament or a gold bar. For example: if a customer wishes to avail some money by selling a gold bangle, they can only sell/mortgage the entire bangle. The bangle usually is not cut in half or only a part of it is sold.
This limitation does not apply to digital gold where consumers can sell gold according to their needs. Digital gold can be sold for as little as Rs. 100 and the proceeds are deposited directly into the bank account of the seller.

Stocks, which are held in units, also offer the flexibility to be sold as smaller units and not the entire holding. An investor can, for example, sell 10 units of a stock and redeem the value for the same.

Never Put All Your Eggs In One Basket

As the age old saying goes, it is always a risky move to bundle all your investments together. There has been an increase in the level of awareness among consumers who are now looking to diversify their respective portfolios by investing in more than one asset. Gold and financial assets are among the most preferred.

Gold is a relatively safe investment option but does not offer great returns, particularly for smaller investors. People therefore shift entirely towards financial assets such as stocks. But these are prone to market volatilities and involve greater risks.

Why is it a bad idea to put all your money into one type of investment?

Let us look at an example.

On March 9, 2020, the stock market crash began. The Dow Jones Industrial Average (DJIA), a stock market index that measures the performance of over 30 stocks listed on the US securities exchange, similar to NIFTY or SENSEX, witnessed the largest plunge in points. This, alongwith two other crashes were among the worst in United States’ history.

gold vs nifty index return bar graph for last 15 years, 2006 to 2021

Graph shows Gold and Nifty are inversely correlated with each other. Gold is a great investment only in times of economic distress.

What caused the Dow to drop drastically?

Rise in coronavirus cases and its mortality rate across the globe sparked fears of extended lockdowns, job losses, etc.. This, along with a drop in oil prices and the possibility of a recession in 2020, caused the Dow to drop by 7.79% on March 9.
A couple of days later, on March 12, the Dow dropped by 2,352.60 points or 9.9%.

It was on March 16 that the Dow fell by a record 2,997.10 points, a 12.93% drop. On that day, the Dow closed at 20,188.52 points. Contrast this to February 12 when the Dow was at its record high of 29,551.42. In a month’s time, the Dow had fallen by 19.3%.

Diversification Helps

Out of the blue, a virus had brought the entire global economy down to its knees. And when the markets crashed, investors suffered heavy losses particularly during the brief bear market run from February to March. A key learning from this incident for investors could be to not club all their money into one class of asset.
The 2020 bear market was relatively short-lived and therefore did not cause much unrecoverable damage for top stocks. However, it was strong enough to cause global panic, pushing investors towards other classes of assets.

In such a situation, a person who has invested equally in stocks as well as other classes of assets such as gold is relatively on safer ground.

Gold price rose to an all-time high in mid-2020 as coronavirus-induced economic breakdowns forced investors to rush towards the safer investment option. Transport and supply-chain disruptions also led to an increase in premium on sale of physical gold in some places, thereby reinforcing the belief that gold is almost always the most valued investment in times of crisis.

It is also important for investors to understand that while gold prices can be volatile, the level of fluctuation is very limited as compared to stocks, particularly in turbulent times.

However, it is key that one has inherent knowledge of their stocks and the performance of the related companies when trading during a low/bear market. When stock prices drop drastically, panicked investors tend to sell their shares in order to prevent further loss. The key to deal with such sudden drops, economists say, is to wait out the turbulent times.
This is where diversification helps. While the investor awaits better days for their stocks, they can remain composed by the belief that there is a safe ground in the form of gold investment.

How To Finally Choose – Gold vs Stocks?

The answer to this question depends largely on the user and the level of risk they are willing to take. As we have discussed in the point above, stocks are best-suited for those who are looking to maximize on returns while also taking a relatively higher level of risk. Stocks can be volatile and require some market understanding in order for the investor to make good profit. But, they also offer periodic returns in the form of interest, dividend payouts, etc. Without a fair understanding of stocks and trading, the investor could very well be walking on a thin double-edged sword.

In the case of gold, it is among the safest forms of investment. The risks involved are low but so are the returns. Gold as an investment is suited for those who don’t wish to take many risks and are not too hopeful of sudden profits. And in today’s times, investment in gold is easier than ever before. Digital gold can be purchased online for as low as Re. 1.

Today, there is a lot of awareness regarding investing as well as choosing the right type of investment. There are many online tools and platforms that can help investors make the right choice. However, one strategy that is commonly agreed upon by investors is for investors to engage in diversification of their portfolio.

With a lot of debate going around about the risks of trading in stocks or the disadvantages of mutual funds, the safest bet is to put the eggs in different baskets. Purchasing gold online is now easier than ever and even available as a Systematic Investment Plan (SIP), similar to what many stock and mutual fund agencies/apps offer today. A consumer can smartly invest small amounts of money, distributed equally or depending on the customer’s convenience, into more than one type of asset.

So even in the case of extreme market volatilities, there is some cushioning to fall upon.

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