Investing vs Saving

Saving can be a simple act of holding on to money. By not spending a certain amount of capital, you preserve that for a specific reason like unforeseen realities or future purchases when you have enough capital.

Saving can be an act of money in a drawer or safe or in a bank account with a fix interest. Most important to keep in mind about saving is the risk of inflation. Inflation is the amount you could lose on the value of your money.

Saving money with an interest rate of 3%p.a and inflation of 5.5% would mean you are effectively loosing 2.5% of your moneys value each year. Even worse, if you put it in your safe you will have 0% growth and loose 5.5% each year.

 

Investing has a much wider description and greater expectations. It can be done by actively participating or passively engaging by paying a management team to manage your money with the aim of increasing your capital above the inflation margins.

Let’s break down investing to the basics. Trading goods or services for profit creates an income for the trader. The other aspect is supply and demand which result in a value increase or decrease like buying property.

John want to increase his capital and find ABC PTY is looking for funding to help expand their operations in order to grow their market penetration to other cities. John gives R100 000 to ABC PTY for a 10% share in the company.

The claimed value of ABC PTY is thus R1 000 000. They take the money and setup an office in a new town which brings in revenue. Over twelve months they increased the value of ABC PTY to R1 100 000. The increase of share value for John is now R110 000. An increase of R10 000 or 10%.

There are many risks in starting your own business or investing in a business someone told you about and you can easily loose ALL your money.

Investing in stocks simply means you will be buying shares or fractions in companies with thousands or millions of shares. Companies who list on the stock exchange are vetted and needs to meet minimum requirements to allow a less risky participation by the public.

Most retail investors choose to invest in mutual funds. A pre-selected basket of listed companies. Mutual funds have certain mandates within risk categories. These can include listed property(Mostly shopping centres/hotels/corporate buildings etc, equities (business trading) , bonds (a bond is an instrument of indebtedness of the bond issuer to the holders).

You also have to keep in mind that sometimes international companies and currency plays a part in beating local inflation.

Investment in trade shares or property requires you to decide on a timeline for example 5, 10 or 15 years. This is important because a company might make a large investment in tools or land which will only result in an income growth in 18 months, which means they might not beat inflation or even be negative for the short term but make a significant growth after engaging their trade and starting the increase of sales.

There are many factors to consider, including sentiment in a particular company or political changes local or across borders. Fund managers have to do research not only on the company and its management, but also the possibility of changes in industries and country politics.

These factors are not clear cut and thus allow for both risk and growth opportunities. The risk of investing are many times refer to as opportunity cost.

If you do not pay opportunity cost your capital will most likely deplete due to the increase of living expenses which is called inflation.

We will look into various investing and its risk and opportunities in more detail with future updates.

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