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What is investing?

by Ryan Guina

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.


Published or updated June 2, 2009.
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{ 4 comments… read them below or add one }

1 DDFD at DivorcedDadFrugalDad

Ryan

Duration can play a big role in distinguishing between saving and investing, but I always view the key difference in terms of risk.

Saving should be a risk free or near risk free situation. Investing involves a risk of loss of the investment.

The difference in risk usually explains the difference in returns.

My two cents.

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2 Ryan

Very good point. And savings can be for a long term duration as well – a good example is saving for a house. Risk is probably the biggest determining factor.

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3 Curious Cat Investing Blog

I don’t really think investing needs any specific goal. For example, Warren Buffet invests in companies but not for retirement or to save to buy a bigger house…

I think it does make sense to try and be clear on your intention with money. I am not against speculation. I both speculate and invest in the stock market. I often don’t mention that distinction but I know when I am buying a stock I plan to hold until my financial situation changes (say Google, Toyota, Templeton Dragon Fund) and stocks I buy that I hope go up so I can sell them.

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4 Craig

I really like the explanation, it helps me personally a lot. I’m figuring out how I can set up saving and investing and what proportion to put towards what. I have a savings account established, and would like to get an investing account started.

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