Investing is one of the most often misused financial terms. 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. 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.
Saving. 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.
Trading. 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.