Which one is better investment: Stock markets or Franchise business?

Rishabh Sharma
Rishabh Sharma Dec 22 2020 - 9 min read
Which one is better investment: Stock markets or Franchise business?
Investing in a stock market or in a franchise business, both have their own pros and cons, but which way to go? Read on to find out in a detailed comparison below.

If an individual wants to earn money but all the sources of income are affected by the covid-19 pandemic, so what should you do? There are some interesting options available for you to make better profits during these hard times. Investing in the stock market or in franchise opportunities can be a tough selection for you. Read to know what is best for you with minimal risks.

Investing in the Stock Market

Indian investors, whether they are new or old in the game, came into the equity market in large numbers during the Covid-19 induced lockdowns. Brokerages across the country reported a massive as more investors chose to dabble with stocks as they stayed indoors during the lockdown. Trading volumes too rose accordingly. It was a huge growth in account opening from pre-lockdown levels (approximately 100%).

A ton of investors entered the market at attractive prices in these times. They saw a profit from the market as an alternative source of income during these difficult times. Staying indoors has given people and new investors the bandwidth to do something that they haven’t done earlier, and the rapid price fall gives the perception that things are available for cheap and they will make some profits. A report from the Securities and Exchange Board of India said the quantity of new Demat accounts opened during FY2020 remained at 4.9 million, a 22.5 % climb from the 4 million Demat accounts opened in FY2019. This, the report noted, was the highest in at least a decade or so. But before you open a Demat account and start juggling with the stocks, let’s have a look at the pros and cons of investing in the stock market:

Pros of Stock Investing

  • Big money: The biggest draw to the stock market is the potential to make a lot on your investment in a short amount of time. It’s all about taking the right decision at the right time by studying the market and, you too can create wealth through the stock market. However, it's important to remember that anything with this much possibility for reward will require significant risks too.
  • Stay ahead of inflation: As witnessed earlier, stocks have averaged an annualized return of 10%. That's better than the average annualized inflation rate. It does mean you must have a longer time horizon. That way, you can buy and hold even if the value temporarily drops.
  • Easy to buy and sell: The stock market allows you to buy and sell your stocks at any time. They can be purchased through a broker at various online platforms. After setting up an account, you can buy and sell stocks in moments. Economists use the term "liquid" to mean you can turn your shares into cash quickly and with low transaction costs and that's important if you suddenly need your money in a hurry. Since prices are volatile, you run the risk of being forced to take a loss.
  • Make money in two ways: Most investors intend to buy low and then sell high. They invest in fast-growing companies that appreciate in value. That's attractive to both day traders and buy-and-hold investors. The first group hopes to take advantage of short-term trends, while the latter expect to see the company's earnings and stock price grow over time. They both believe their stock-picking skills allow them to outperform the market. Other investors prefer a regular stream of cash. They purchase stocks of companies that pay dividends. Those companies grow at a moderate rate.

Cons of Investing in Stocks

  • No guaranteed return: You could lose your entire money. If a company does not perform well, investors will sell the stocks, sending the stock price plummeting. When you sell, you will lose your initial investment. If you can't afford to lose your initial investment, then you should buy bonds. You get an income tax break if you lose money on your stock loss. You also have to pay capital gains taxes if you make money.
  • Brokerage commissions kill profit margin: Whenever an investor buys or sells his shares, the brokerage commission has to be paid to the broker, which kills the profit margin of the stockholder.
  • Time-consuming: Investment in stocks is not as easy as investing in a lottery. You have to understand the market by analyzing financial statements and annual reports, following the company's developments in the news and your own stocks, before dipping toes in it.
  • Fear of losing: Stock prices fluctuate every second. Investors tend to buy high, out of greed, and sell low, out of fear. These factors result in loss of money for most of the people investing in stocks.

Investing in Franchise Opportunities

The COVID-19 pandemic has caused numerous problems for investors and franchisors across the country and the rest of the world. So, if you think that starting a business during this period of economic uncertainty isn’t the best idea, you might be wrong about it. Most of the entrepreneurs and investors are considering this pandemic as an opportunity to invest and grow the business. Franchising offers fantastic opportunities to start and grow your very own successful franchise.

Many aspiring entrepreneurs are actively investing in franchises and becoming their own bosses and making profits. Unlike the stock market, you don’t have to worry about your investment all the time in a franchise business. Being your own boss you can manage your time accordingly and with the hard work needed, you will make big profits definitely. As the known uncertainty of the stock market, you don’t have to be distressed about losing your money here in the franchise sector, you just have to be patient and devoted towards your business, that’s all. Some of the major pros and cons of franchising are listed below:

Pros of Investing in a Franchise

  • Well established business plans: If you want to start a business but don’t feel like doing the hard work of crafting it from scratch, choosing what to sell, decorating your store, and all the other things involved in setting up an independent shop, buying a franchise might be a good option for you. Becoming a franchisee offers a lot of the benefits of starting a franchise business without some of the start-up headaches.
  • Recognized franchise brand: Franchises come preloaded with a name that people know and trust. Getting customers to recognize your brand is an incredibly difficult thing but a franchise has a name that is recognized globally. For customers, there is no doubt what you’ll get when you walk into a known and trusted franchise. That’s a valuable value add for your business ventures.
  • Franchises are less risky: If you buy a franchise, you already know that the product is successful. It has brand recognition, for one thing. Assuming the franchise is in a good location and the brand continues to attract customers you should have a pretty solid business on your hands. If you want to be a small business owner but you don’t want to risk a lot of time and capital on a venture that could fail, you might be drawn to franchising.
  • Training programs: Perhaps one of the biggest advantages of buying a franchise is the training and ongoing support you receive from the franchisor. There will always be someone to call when a question or problem arises. You’ll get help bringing new hires up to speed on how things operate. Often with on-site training on opening procedures, daily operations, using point-of-sale software, and a lot more.

Cons of Investing in a Franchise

  • High startup costs: Depending on the system, startup costs for a franchise can be steep. Many franchise owners find it necessary to secure financing in order to purchase their business, but there are various options available to go for a low-cost franchise as-well.
  • Ongoing fees: Franchisors require franchisees to pay ongoing royalty and/or advertising fees for using their name and system, you will always owe a percentage of your profits to the franchisor.
  • Less autonomy: If you are the type who likes to be his own boss and want to operate things according to you, franchising may not be for you. Buying into a franchise system requires you to run your business as dictated by the franchisor with little leeway for business decisions at the local level.
  • Contractual agreement: When you buy a franchise you sign an agreement that locks you in for a specified amount of time, anywhere from five to 20 years approximately. Breaking a franchise agreement can be difficult and costly.

Conclusively, as a nation, we don’t know whether this trend of investing will keep going ahead as it is now. Trading activity and volumes do shoot up in times of uncertainty, and then they dry up or flatten post such unstable periods. As the uncertainty always remains, you don’t know whether you are gonna make a profit or not in the stock market. It’s always a risk which for most people not worth taking. However, franchising business offers you very low risks and greater chances of making profits with various stabilities.

It would be foolish to expect a quick economic rebound from the current COVID-19 effect. Though the financial crisis is inevitable, considering all-out efforts by the Indian government and fiscal authorities, to soften the blow, a deep economic slump might be avoided. The problem in the current scenario is that until we know how quickly and thoroughly the public-health challenge will be met, economists and entrepreneurs cannot predict the endgame of this crisis.

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