Investing is one of the most often misused financial terms especially for beginners. The word “investing” is often used correctly in the broad sense of the term, but it is often used interchangeably with words that have similar but distinct differences.
First, what is investing? According to Investopedia, an online financial education resource, investing is “the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.”
In the broad sense of the definition, investing can be any money that is used to try and turn a profit. The problem is that people often use the term “investing” when they are talking about similar financial actions – most notably saving and trading stocks.
The Difference Between Saving, Investing, and Trading
The following are my definitions of investing, saving, and trading.
Investing for beginners
Investing implies a long term approach with a specific goal. For example, investing for retirement or college. Both of these can have a predetermined date and targeted dollar amount. A good rule of thumb is not to put money into the stock market if you will need it within 5 years, which satisfies the long term approach and allows for market fluctuation. The goal of investing is usually maximizing growth with an acceptable amount of risk.
The difference between saving and investing is the amount of risk you are willing to take. Savings can be used for short or long term goals, but usually involve little to no risk. Most people put savings into guaranteed accounts such as a CD ladder or savings account. The goal of saving is often more about preservation of capital than maximum growth.
The biggest misconception in investing for beginners.
Investing is also often used instead of the terms trading, or day trading. Again, the distinction is the duration of time. Traders make stock trades based on market trends, with the goal of making money with short term trades. It is not uncommon for traders to own stocks less than a day, month, or year, whereas investors typically purchase a stock with the intention of owning it for several years. The goal of trading is not long term growth, but short term gains.
Is it a Problem to Use These Terms Interchangeably?
In some cases there may be an overlap between the terms and using them interchangeably is acceptable. But using the terms incorrectly may cause confusion for someone who doesn’t know the differences with the terms saving, investing, and trading. It is important to know the differences with these terms – it will help you set up your short and long term financial goals.
If you’ve never invested before, it can be scary to start. Investing is one of the best ways to lay a secure foundation for your family, but it’s overwhelming to create a portfolio and let your money start working for you. Thanks to the Internet, there are dozens and dozens of different ways that you can start, and it’s not as hard as it looks.
One of the easiest ways is to create an account in a peer-to-peer lending sites. The idea of peer-to-poor lending is an ancient idea. As long as people have needed money, there has been people willing to lend them those funds. Thanks to technology, it’s never been easier to loan money to other people and make a nice profit while you do it. There are sites like Lending Club, that make investing as simple as a few clicks.
With Lending Club, all you have to do is create an account, verify your information, and then start investing. You can have an investing account in as quickly as an hour, and then after that, you can start making money through the peer-to-peer websites. After you have your account, then you can start investing in the available loans. You can browse all of the borrowers that are looking for money, and you can see the different details of the loan.
Lending Club has two separate options for investing. They have a manual investing option, which allows you to go in, look at all of the investment opportunities and compare them to find the one that works best for you. If you don’t want to be as hands-on, they also have an automated investment option. With the automatic investing, all you have to do is set your goals and how much you want to invest, and Lending Club will handle the rest for you. This is a great option for anyone that’s new to investing or doesn’t want to put in all of the hours doing the research.
Another unique advantage of Lending Club is the size of the investments that you can buy into. Because these loans are originated by borrowers, you can find loan requests of just about any size, but you can buy notes for these loans as small as $25. This is a great way to invest your money with some of the extra cash that you have sitting in your savings account. This is also a great way to diversify your portfolio without having to open dozens of different investing accounts.
Micro-Investing for beginners
Another great way to get started in the investing world, is to partake in “micro-investing,” which is exactly what it sounds like. Unlike some investment vehicles, which requires $10,000 to start, with these micro-investing programs, you can invest with a couple of dollars. Sites like Acorns are an excellent example of this. After you create an account, Acorns will look at your accounts and your spending habits and decide how much that you can safely invest. They will automatically invest a couple of dollars every month in a variety of different avenues. Because you don’t have to manually invest the money, this is a great way to boost your portfolio with the spare change that will be sitting in your account anyway.
With an Acorns account, whenever you make a transaction, the app is going to round up to the nearest dollar and then invest in extra cents. They will put these investments in a variety of different ETFs, as well as foreign and domestic investments.
Investing, Better Late Than Never
Making wise investments is one of the best things that you can do for your future. It’s one of the most efficient ways to give yourself a secure foundation for your retirement, but getting started can be confusing and overwhelming, but as you can see, there are plenty of quick and simple ways that you can start your money making you more money.
Investing for beginners can seem a daunting task but the most important is to start as soon as possible. The sooner you start the better you’ll do.