There are significant differences between investing and saving. When it comes to investments, it’s the intent and the timeframe that differs considerably from the nature of savings. Investments typically span at least 3 years but can be significantly longer depending on what your objectives are.
With investments, individuals, and corporations typically purchase shares of companies with the expectation of capital growth. This linear progression works alongside the buy low, sell high paradigm. In a conventional investment, the way you can generate returns is if the underlying asset appreciates. There are 4 broad categories of assets, notably stocks, commodities, indices, and currency pairs. The factors that influence asset prices include geopolitical elements, monetary policy, technological advances, et al. Investments are growth-oriented assets. A person may invest for putting a down payment on a property, paying off a property, retirement objectives, etc.
Typical investments are found in blue-chip stocks on leading bourses. These stocks might include Google, Facebook, Caterpillar, Barclays Bank, Apple Incorporated, Samsung, General Motors, Toyota and others. As these companies report favourable earnings growth, so their share prices rise accordingly. Over time, the expectation is that an initial, or ongoing investment, will generate yields over and above a conventional savings account.
What Are Savings and How Are They Classified?
There is a much greater element of risk with investments than with savings. Savings are the ‘safe’ way to invest funds and are typically insured by the government, banks (FDIC), and other financial institutions. When you’re saving money, you’re not spending everything that you earn. Savings are only possible if your expenses are less than your income. Savings are geared towards the preservation of capital. You can save money in a multitude of ways, including money under your proverbial mattress, money in the bank, money in a fixed-interest-bearing account and so forth.
Most savings are held in low interest accounts. These savings accounts are not designed to grow money like investments are – they are meant to simply store your money at a low interest rate. The benefits of having savings is that you have money available in the event of an emergency. If an unexpected medical bill arises, it’s your savings that can help you take care of those expenses. Likewise, if your motorcycle gets a puncture, or the timing belt on your SUV snaps, you can use your savings to take care of these expenses. It is foolhardy to use other people’s money a.k.a. credit cards and lines of credit to take care of expenses since you will only be paying more on the unexpected expenses than the actual cost entailed.
What Are Some of the Best Ways to Reach Financial Independence?
So far, we have discussed investments and savings as surefire ways to put aside money for future purposes. Scant mention has been made of trading. Trading is different to savings and investments, since it is neither a passive way to use your money, or a long-term approach. With trading, you’re capitalizing on short-term price movements of underlying assets – bullish or bearish – to reach pre-stated financial objectives.
With trading, you can generate profits regardless of price movements. For example, your investments in gold could be trending bearish if the price of gold is declining. However, you can use trading as a way to hedge against a downturn in gold prices. By placing a put option on a gold CFD contract for example, this contrarian investment practice can help you to reach your overall financial objectives. With trading, you are at greater risk since there is very little concrete evidence to substantiate price movements in one direction or another. Often, a trader will use technical and fundamental analysis to gauge the pulse of the market, and make a snap decision.
The most important rule regarding investing, trading, or saving, is a sound understanding of financial basics. Whether you are dabbling in exchange traded funds, commodities, FX, bonds, CFDs, or stocks, it is imperative that you source your information correctly. There are a variety of resources that can be tapped into, including financial analysts, respected investors, financial journals, news outlets, and media talking heads. The opinions of captains of industry are equally important, since their perspectives often shape speculative behaviour.