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The Art market or the Stock market? Arts are under-estimated assets, and the art market is quite under-reported. However, investing in art presents investors with several benefits. In fact, the art market might be comparatively better than the stock market.
When people talk about investing, they talk about asset classes. They then give examples of items such as stocks, bonds, real estate, cryptocurrencies, and a host of others. However, these are not all there are to investing. And there are a lot of other, potentially more rewarding, options.
Most likely, you do not know about the market for creative works. And even if you do, there are chances that the only idea you may have about it is that of a billionaire purchasing another of Picasso’s legacy works. But the market is much richer, more exciting, and more rewarding than you may think.
In fact, you may be shocked that it may even be better than the stock market for investing. Here, we will introduce you to the world of the art market, comparing it to the famed stock market.
The stock market needs no introduction. However, we cannot assume, so let us give an overview.
Let us start with the scenario of a typical computer science grad who lands a software developer job at a big firm. Soon, he notices market demand for a particular software service and decides to fix it. Not only that, he is fed up with everything – the pay, the bureaucracy, the lack of career growth, amongst other things.
So, he decides to set up his own startup. In the beginning, he wholly owns his business. However, as the business grows, he needs more capital to fund expansion – capital that cannot be generated from the business operations alone. So he has to seek it from outside, from others.
He meets a group of persons who want to commit funds. In return, he gives bits of his ownership of the company to each of the persons according to the amount of capital contributed by each of them. These bits of ownership are known as shares. A group of these shares in a particular company is called a stock.
Then the business grows big and, in search of even much more capital, subsequently lists on a stock exchange. Now, the general public can purchase shares in the company. Also, members of the public can sell the shares between one another. The place where this buying and selling occurs is the stock market.
In essence, when you purchase stocks in a company, you are purchasing ownership in that company. And that comes with some perks.
By far, stocks are the most popular assets in the world – in fact, more popular than real estate. Thus, the stock market is the most popular asset market. This is so because of several reasons, which include:
Liquidity in finance and investing terms refers to an asset’s ability to be bought or sold easily. A (highly) liquid asset is one which market participants can buy and sell without causing much change in its price.
The stock market is very liquid. A person looking to purchase stocks can do so relatively easily and fast without any price changes. Likewise, sellers will always find buyers. However, that is not the case with many other asset classes.
This liquidity of the stock market also makes it volatile. The price of stocks can move quite fast over a short time.
Another benefit you get from investing in stocks is that it is relatively easy. In the past, you could only trade stocks by calling a broker and placing orders. However, with technological advancement, you can now purchase stocks from mobile apps in minutes. This is against many other asset classes for which you need to undergo rigorous processes before you can invest.
The stock market can deliver dramatic capital appreciation. We have seen certain stocks give high returns in hundreds of percentages within a few months. This is one of the reasons many investors go for stocks. However, we must note that the dramatic returns in the hundreds of percentages are quite untypical and not so common.
Let us recall that a stock symbolises ownership in a company. As an ‘owner’ of a company, you are entitled to a part of its income, depending on the value and number of shares you own. This is known as dividend. So long you have not divested your stake in the stock, you will continue to earn from time to time.
However, not all companies pay dividends.
When you own shares in a company, you enjoy the right to have a say in its affairs. This is especially true of crucial company decisions. However, again, not all types of stocks give the right to vote and participate in decision-making.
Having discussed the benefits of investing in stocks, we should also mention its potential downsides. By far, the biggest downside with stock investing is the potential for losses. Just as stocks can deliver good capital appreciation so can the reverse also be the case. In fact, there have been cases where stocks have experienced rapid drops in just a single day of trading.
Another is that stocks and the stock market are susceptible to market manipulations and fraud. Here, certain entities can engage in practices via which they profit at the expense of the market.
Well, here we are. The art market is the place for the purchase and sale of works of art. In this market, you get to buy and sell commodities and services relating to art. Its participants include artists, art collectors, as well as investors – both large and small. The art market is worth over $70 billion and is growing at an average of 8% year-on-year.
This market has a lot of potentials, a lot of which you probably have not discovered.
Investing in art has many benefits. Some are outlined below:
Art has been known to deliver sure returns year after year. Figures put the annual average returns at 9%. Blue-chip art prices have increased by over 1,000% in the past 25 years. Well, you may say, “The S&P has returned more than that.” However, you know those years also include years of losses? Would you instead invest in something that delivers steady, sure returns every year, or in that which is highly uncertain?
While the stock market’s liquidity might seem like a huge benefit, and rightly so, it can also be a massive downside. Prices fluctuate wildly. However, with artworks, you do not have those wild fluctuations.
Okay, you invest in stocks and bonds or mutual funds. These are investments that you necessarily do not have control over. However, with artwork, you have maximum control over what you invest and are fully responsible for it, rather than potentially losing it to market manipulations.
As an investor in art, you are first a collector before an investor. When you get to invest in art, you get to display and enjoy the aesthetic and symbolic value of your “investment.” We do not think there is any way you can do the same for stocks or bonds.
Artworks have objective and intrinsic values, unlike assets such as stocks and bonds, whose values only increase or decrease based on the prevailing buying or selling activity level. It is often the bandwagon effect that makes people rush into the stock market without any real reasons. However, you don’t have this with arts whose values are usually objectively determined.
Since artwork prices rarely go down, they can serve as buffers, and a means for you to diversify your investment portfolio.
You may ask: if the art market has so many benefits, why is it not popular? Well, that is because so many myths still surround investing in it.
Not all art pieces are expensive, and the fact that “small” investors are now flocking into the art market should be a pointer to this fact. Nevertheless, with technological advancement, it is now possible to invest in art units rather than whole art items. Well, you may also purchase “stocks” in artworks.
That is, if the artwork is expensive, you can contribute just a part of the cost to be an owner. One of the organisations making this possible is Masterworks.
Well, people are wrong on this too. Do you know that the market consistently does over 35 million transactions every year?
While you may not expect the same level of liquidity as you find with stocks and bonds, artworks are much more liquid than you may think. You can make purchases quite easily on many online auction and display sites.
Technology is fast making it easy to invest in artworks. So, this myth may not stand anymore. Arts are quickly becoming an asset class to reckon with, and as with every asset, the earliest participants often tend to take the biggest chunk of the pie.
Thus, it will be great for you to get into arts – and to get in, now.