The first step to become a very successful investor is to understand the difference between saving, investing, and speculating. Although closely related, these are totally different concepts. Misinterpretation of these three concepts can put you at serious risk of losing your capital invested.
A process of putting money aside for short-time purchases in the future, savings refer to money accumulated for a timeframe of typically less than three years. Savings safeguard your money. You can save your money in a savings bank account, money market instruments, and bank FDs. That said, the ROI on these methods for saving will be now where near enough for beating inflation in the future and protecting your capital. For that, you will have to consider investing as an option.
If savings are a short-term process, investing is a long-term process. All you have to commit is a potion of your saved money, which you can invest in different equity and debt asset classes for better returns and growth of your money. Investing helps you grow your money into a much larger corpus, which is the key differentiation from savings. Based on your risk profile, investment time horizon, and financial goals, you can invest your money into asset classes such as stocks, bonds, debentures, gold, CFDs, IPOs, NPS, non-convertible debentures, and real estate. The best part about investment is that you can also save on taxes by investing in equity classes such as ELSS tax saving funds and NPS. This way, you not only save on your taxes, but also grow your portfolio and corpus. When you spread your money in different asset classes, you will not only spread your market risks, but give your portfolio the best chance to grow.
Investing follows the simple principle of risk vs. return trade-off. Thus, higher the risk, higher the returns you get, and vice versa. Thus, your risk profile becomes a crucial step in your investment planning. One of the biggest advantages of strategic investing is that it may fall in value in the short term owing to different economic and political factors along with company fundamentals. However, in the long run, your stock market investments will make you a sure winner provided you stay invested for the entire horizon adopting a strategic investment approach.
Many of us do not have the patience to see our money grow slow and steady during a long-term investment horizon. Thus, we look for growing our money much more quickly. This is where speculating comes into the picture. Unlike investing, you will place your money at risk while speculating with the hope of earning a higher return in a shorter timeframe. A good example of speculating is day trading in stocks where you buy and sell stocks within minutes or hours. Please note that while speculators can win big, they can also lose big.
Thus, ‘save’ to PROTECT your money, ‘invest’ to GROW your money, ‘speculate’ to GAMBLE with your money.
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