Should you save, invest or trade?
You may have heard the buzzwords saving, investing and trading many times. Have you ever wondered what on earth is the difference, if any, between these?
Sowetan consulted experts to shed some light. In its series on investment education, titled Investment 101, Allan Gray emphasises that it is important that you understand the differences between these three financial activities before you choose which one to take up.
Saving simply means putting money away for future use, Nilan Morar, the head of trading for the Purple Group, says.
Thandi Ngwane, the head of strategic markets at Allan Gray, says that typically when you save you deposit money in a bank, and the bank promises you a certain level of return after a specified time.
"We save for short-term purchases and emergencies to keep our money safe. It must be available when we need it and have low risk of losing value," Aneesa Razack, CEO of FNB Share Investing, says.
Grant Locke, MD of Outvest, says that along with short-term call deposits offered by banks, you can save in a money market fund, which can also be readily liquidated.
But if you are planning to use the money you set aside only after at least two years, Locke recommends you invest it.
When you invest, you aim to reach your goal by growing your money faster than inflation. The key is to beat inflation.
"We invest long term, for our children's varsity fund or our retirement.
"We use specific vehicles that allow our money to grow faster than inflation so that we can keep up with the rising costs of these long-term goals," FNB's Razack says.
In addition, your money should work for you on an after-inflation basis, earning interest on interest and therefore compounding each year.
Purple's Nilan cautions, however, that when you invest, you typically take on an element of risk, unlike saving in a bank account, where many banks guarantee the interest you earn.
"It is possible to get fantastic returns on the stock market [for instance], but it is also possible to lose ...
"Direct share investors need the time to research and analyse stocks, and they compete with professional managers in an unforgiving environment," Ngwane says.
All the experts agree that if you invest it should be over the long term, which can be anything from two to 30 years.
They also all agree that trading is best left to the experts, even though you can make phenomenal returns within a short space of time.
This is the arena where overnight financial success - and overnight bankruptcy - are equally possible.
So it's not really for the faint-hearted, those who don't know what they are doing and do not have the time to find out.
"Trading involves the frequent buying or selling of [assets] in order to achieve a profit from the trades," Razack explains.
The essential difference with trading is that your investment horizon is usually short term - a month, week, day or even an hour.
The primary aim of trading is to profit from the change in price of an asset, Locke says.
It is about taking advantage of market volatility to your favour, Nilan adds. Trading is therefore highly speculative, high risk but with potentially very high returns.
Trading shares may be appealing because you hear about companies' good returns on a stock exchange like the JSE.
But you don't have to trade on the JSE to make money - you can also invest, buying and holding a diversified portfolio of shares that you expect will appreciate in value over a longer term.
Investing in exchange-traded funds, which give you access to a number of shares in a single purchase on an online trading platform, offers the first-time investor an easier way to do this than researching and selecting your own shares.
Would you like to comment on this article or view other readers' comments? Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.