When it comes to investing, most people are intimidated, confused, or afraid. Many people think it is mysterious or just plain bad! It is not uncommon to get asked the question, “Investing is like gambling, right?” I am going to attempt to explain the difference between investing and gambling in simple terms. Let me know how I do!
WHAT IS INVESTING?
Investorwords define investing as: “The purchase of a financial product (stocks, bonds, mutual funds) or other item of value (i.e. real estate, art, a business) with an expectation of favorable future returns (profit or income). In general, investing means the use of money in the hope of making more money.”
Let’s make it plain: investing is putting your money to work. Most of us believe the only way to make money or to earn an income is by getting a job or trading hours for dollars. Investing is another way to think about making money or generating another stream of income.
TYPES OF FINANCIAL INVESTMENTS
For simplicity of explanation, all references to investing are referring to stocks. Please note that there other types of investments, including bonds and mutual funds (a collections or portfolio of stocks and bonds owned by a group of investors and managed by a professional investment company.)
WHAT IS A STOCK: A type of financial investment that signifies ownership in a corporation. As a shareholder, you participate in the company’s performance, positively or negatively.
WHAT INVESTING IS NOT
Investing in stocks is not gambling. Because of the risk associated with investing in stocks, many people confuse it with gambling. Gambling is a game of chance. It is “spending” dollars with the HOPE of WINNING money. There is no exchange of a product of value. The only value of exchange is the emotional thrill of winning or the emotional despair of losing.
When investing in stocks, you are purchasing a financial security (shares of a company); usually proceeded by research and expert guidance, if needed. Money is exchanged for something of value that can be sold for money later, hopefully at a profit. While there is risk that the value of the stocks may decline, you still own them and have choices.
An example for today is real estate. Let’s say, you are a real estate investor and purchased property in 2006, with the intent to sell it later for a profit. The purchase of the property is an investment. In 2012, the value of the property is less than what you paid for it. You still own the property and have options. You can decide to sell it at a loss and recoup some of your initial investment (money) or you can hold on to it and wait for the value of the property to go up (appreciate) and recoup all of your money. Even yet, you can wait even longer and the price of the property may go up higher than what you paid for it (the initial purchase amount) and you earn a profit (also called capital gain).
Investing in stocks works the same way. The fact that stocks can potentially lose value is why so many people equate investing in stocks as “playing the stock market” or gambling. It is also why many people, especially women fear investing. The lost in value looks like lost money. It is, but only on paper. Although the stock market goes up and down, the loss in value is not realized unless the stock shares are sold, just like with the real estate example above. You still own the shares of stock, the price is just down. You haven’t lost any real money. If you think the investment is still good and hold on to it, the price of the stocks may go back up and then you will recover the initial amount and in some cases, earn a profit. (Note: please obtain professional opinion to aid you with your decisions).
This potential loss of money in investing in stocks is the risk associated with investing. Risk is not bad, just misunderstood. Investing takes patience and perseverance. It is not a get rich quick option. While there is risk associated with investing and no guarantees, investing is better than hoping in Lady Luck.
Make sense? Leave me a comment below and let me know how I did.
This post is part of Women’s Money Week 2012. For more posts about savings and investing see Saving and Investing Roundup
DISCLAIMER: This article is intended for educational persons only. Any investments mentioned are not endorsements or recommendation. Please consult a financial advisor or professional to discuss the best option for your personal situation.
Samirian Hill, The MoneyWise Teacher, is the President and Founder of BudgetWise Financial Solutions, where they teach people to manage money wisely. She is a financial educator, contributing writer, and blogger. She enjoyes golfing, reading, and cooking.