Most people use the words saving and investing interchangeably. And there are thousands more who take investing as gambling or speculating. Unfortunately, both are wrong.
Saving and Investing are two very different things. And investing is not gambling, if done properly by doing enough research before investing.
Let’s first see what is the real meaning of these three terms and then focus on their differences.
This term does not need any introduction. It’s being done by everyone for small and short-term goals (generally 3 years or less).It is typically achieved by parking small amounts of money in financial products with minimal risk (like savings account, RDs, FDs, etc.). The idea of ‘saving’ is to generate small returns without taking much risk.
In other words, saving involves putting money aside for the future with the aim of capital preservation and not high returns.
Investing is generally done for the long term (3-5 years or more) with the aim of growing money at rates higher than what savings offer.
When investing, your money is parked in assets that generate higher returns compared to risk-free assets. So obviously, these higher returns come with some degree of risks. But smart investing can manage these risks efficiently.
Unlike savings, the primary goal of investing is not preservation of capital but maximization of long-term returns that speeds up long-term wealth creation. Some examples are: investing in long-term investment worthy multibagger stocks, real estate, startup funding, etc.
Saving Vs Investing
Most people consider them to be one and the same but they are worlds apart.
You cannot expect to create real wealth just by saving. That's because the returns from savings are very low. On the other hand, in spite of the risks associated with investing, the average returns earned over long term are significantly higher.
Here is what the value of Rs 1 lac saved in a bank FD @7% post-tax returns vs Rs 1 lac invested in Sensex would have been over the last 15 years (2001-2016).
Clearly, investing is far more superior when done for the long term.
Savings can never generate such high returns which are possible only by investing for the long term.
True wealth creation happens only when you invest and not when you save.
Now let’s try to clear another myth that people have: Investing is like Gambling/Speculating.
But let’s first see what gambling is.
Gambling depends purely on speculation, chance and random luck. It usually involves dividing up a fixed pie among winners and losers based on chance.In unregulated gambling options (like lottery, etc.), there are other factors too that reduce the fixed pie (like costs, management fees, etc.) before distributing it to the winners.
So what happens is that the odds are really against the players as the “winner” takes a smaller pie than what even originally existed!
Examples: Lotteries, casino games, even futures and options (when done without much thought).
Why Investing is not like Gambling?
It’s a myth that investing is like gambling. And this myth has origins in mistakes of people who trade stocks without any knowledge or rationale (and on tips) and lose money. Being unable to accept responsibility of their losses(which are because of speculation), they feel that ‘all’ investing in equity markets is like gambling. And that is what they tell others too.
But this myth has no basis at all.
Investing is not like walking into a lottery market and buying a ticket and then hoping to win amongst thousand others (though many people who invest based on tips hope for that outcome).
Unlike gambling that involves random chance, successful investing requires some effort - like doing fundamental research about how the businesses will do in future, their financial strength, valuations, comparisons with peer group, industry and historical factors etc.
Fortunately, doing some honest research (i.e. fundamental analysis of stocks) and then investing in stock markets can significantly increase the chance of making some serious money.This is unlike putting money on the roll of a dice and waiting for the lady luck’s favor(i.e. gambling).
For those who invest properly and for long term, the odds are in their favor. In gambling, the odds are against the players…always.
You also cannot hope to use gambling when saving for financial goals. What you need then is to have a rational and planned investment strategy that increases your chances of creating wealth and accumulating money for future goals.
Investing is based on skill and requires the use of a system based on proper fundamental research whereas gambling is based on pure luck and emotions.And we are quite sure that you can easily recognize where the chances of success are higher.
As might be clear by now, all three, i.e. saving, investing and gambling are different animals.
Though most people avoid gambling, it is important to understand the actual difference between saving and investing and use them correctly. Both have different purposes and play entirely different roles in personal financial strategies. Recognizing and accepting these difference is the only way to manage and grow your wealth successfully.