Stock Investing vs. Saving
Investing is defined as the activity of making money with the money you have at hand. In this way you make the money you have available work for you, not the vice versa.
Investing vs. Saving
Whereas investing represents a proactive activity the opposite is true for saving. Saving incorporates compounding, in which it is similar to investing. However, the safety of principal is the primary goal of saving. The principal represents the money you have initially deposited into your account. As a result of the principal focus occurring in saving, returns represent an issue of less importance.
The opposite is true for investing. When you invest your major concern is the returns you will generate. Investing can range from conservative to aggressive regarding risk levels. That is why risk levels are used when evaluating results. This is done by comparing risk with potential returns.
Many beginner investors find it difficult to make a clear distinction between investing and saving when classifying their accounts. Nevertheless, each of them has its unique characteristics that you should be aware of.
Next, we are going to explain stock investing according to ownership, risk and upside potential. We have chosen these criteria in order to help you make a clearer distinction between investing and saving.
If you want to become an owner of a publicly traded company the best way to do this is by purchasing stocks of this company. In this way you gain a right to vote for important issues concerning the activities of the company. Additionally, you get a percentage of its profits. The latter is applied whenever the company you have chosen makes dividend distributions.
Stocks differ from the different saving tools in the ownership dimension, since no saving account gives you a percentage of the financial entity in which you have opened it. For instance, if you have purchased US Treasury bond you don't automatically become an owner of the US government.
You should be aware of the fact that the potential high returns may turn against you and the next time you may sustain losses. Stocks are characterized by a certain level of risk and thus don't guarantee you that you will always make money from them.
If you are uncomfortable with the thought of losing money may be stocks are not right for you. In such cases it is recommended to open a savings account. On the other hand you should not fall in the common delusion that savings lack whatsoever risk. Keep in mind that the returns are also lower, since savings trade with securities, which combined with the effects of taxes and inflation may leave you with meager returns.
- Upside Potential
By purchasing stocks of a company you become one of its owners. As such you participate in the growth of the company. This means that once the value of the stocks start to go up, the value of your investment also appreciates. As a result the amount of the dividend distributions increases.
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