Why Stocks? Equities vs Commodities(Gold)

People tend to believe that gold is better and a safer investment, it can certainly be much safer than equities but equities always have an upper hand when it comes to rewarding the Investors with returns.

Stock prices are based on the earnings of underlying business. If the business manages to post good set of results the same gets reflected in the stock prices. Since the stocks are valued based on earnings of the underlying company. Therefore, one can easily evaluate iits true value and at a given price, one can estimate whether the stock is overvalued undervalued or fairly valued. When stocks are undervalued the cheap bargain helps in increasing the profitability ensuring margin of safety.

On the contrary, we have commodities which do not earn anything.

For Ex. a kg of gold remains to be a Kg of gold irrespective of how long it is held. As commodities have no earnings it is not possible to determine the true value of it. Therefore, at a given price one cannot determine whether commodities are undervalued, fairly valued or overvalued.

Returns: Equities v/s Gold

Return of Equities During Year 2001-2015

Sensex has managed to raise from 2600 up to 25800 in span of 14 years which equates to a compounded annual growth rate of 17.812% per year.

In spite of a crash of over 60%+ during the economic crisis of 2009 equities have managed to grow at 17.8% CAGR making it the best returning asset.

Return of Gold During Year 2001-2015

Gold has managed to appreciate from 351 to 1100 in span of 14 years which equates to a compounded annual growth rate of 8.5% per year.

The above performance clearly proves that equities have turned out to be a much better investment than gold. Equites offering over 17% annual growth rate makes them highest returning asset class

Real Rate of return:

Inflation: Inflation refers to rise in prices of goods or services over a period of time due to higher demand or less supply. Inflation makes free cash worth less and also reduces the actual realized return from the investment.

Inflation in India:

The Average Inflation in India from the data of past 20 years is 7.13%

Considering Inflation at 7.13% the real rate of return from equity becomes 10% where as that of gold is mere 1.5 to 2%, which therefore undoubtedly makes equities a better investment.