Part 2 of 10 of my series “From Saver to Investor” aimed at those entering this murky world for the first time.
Before I started investing I had no clear idea of what it meant. Mainstream media in the UK seems to paint investments with the same light as they do gambling. A kid of the 90’s, I imagined stressed traders shouting shouting “sell it all now!” down phones. We only know what we see in Hollywood when it comes to investing and most of the time, they’re not investors being portrayed on screen, they’re traders. Very different beasts and very important you build yourself as an investor, not a trader.
Traders don’t really want to own the assets they buy, they want to bet on the direction of it’s price movement and exit their position as soon as they can.
Investing is not betting. It’s not luck. It’s ownership and understanding that difference changes everything. Investing is owning things that make money while you’re not working.
The line between trading and investing can be easily blurred because you’re often trading USD, GBP (or whatever fiat currency of your choice) for an asset to build wealth. Investors will tell you they made life-changing money from this trade or that. They traded fiat for the asset of their choice for an extended period of time, that was their investment strategy, that was the ‘trade’.
Saving vs. Investing — The Core Difference
If that seemed a bit too much too soon, don’t worry. Let’s start simple.
- Saving is about storing money. (Feels safe but isn’t, remember, the melting ice cube? from part 1)
- Investing is about growing money.
When you save, you lend your money to a bank. Interesting fact; the money in your bank account belongs to the bank, not you. You give them your money, they give you a bit of interest and use your cash to do more profitable things themselves.
When you invest, you decide where your money works such as in businesses, governments, or projects that produce real-world value.
The risk is higher, but so are the rewards. You’re taking back control of where your money goes.
What You’re Actually Buying When You Invest
Let’s demystify the main ingredients of investing:
1. Shares (or “Stocks”)
Buying a share means owning a tiny slice of a company.
If you buy Tesco shares, you literally own part of Tesco, the stores, the vans, the staff, the profits. When Tesco earns money, you earn money (through dividends and rising share prices). When Tesco struggles, you feel it too.
That’s investing, you’re not betting on a number going up, you’re sharing in real-world success or failure.
2. Funds and ETFs
Common advice for beginners is this; don’t buy individual companies.
Instead, it’s often recommended that beginners buy funds, which are bundles of hundreds or even thousands of shares.
Think of it like owning a shopping basket of businesses, someone else culls the weeds of dead businesses from the fund and picks new winners based on set requirements, instead of betting on one. These tend to track the general market quite well, giving you an average, relatively safe, market return. If one company stumbles, others keep you afloat.
These funds own hundreds of companies and completely take out the burden of stock research and portfolio management for the investor. That’s what makes funds so popular. With less time spent hunting for a decent company to invest in, you have more mental energy to go an earn more money to invest.
3. Bonds
A bond is a fancy word for a loan. You lend money to a government or company; they promise to pay it back with interest. They’re generally steadier than shares, but returns are smaller. Traditionally, when you mix shares and bonds, you get balance — growth and stability. Some people sit heavy in bonds when they think the stock market is getting a bit too frothy and they think they can wait for better stock prices. I don’t advise you to think this way until you’ve had many years in a market. I’m also, personally, not a fan of bonds, but they exist and you’re free to use them if you don’t like the ‘risk’ that comes with stocks.
The Role of Companies and the Economy
The stock market isn’t just numbers on a screen. It’s the beating heart of the economy. Every product you buy from your morning coffee to your phone, comes from companies that raise money through investors. Contrary to what some ‘tax wealth not work’ campaigners might think about investing, asset holders and wealth…When you invest, you’re not just chasing returns, you’re funding progress.
And as businesses you’ve invested in grow, create jobs, and earn profits, you get a cut of that growth. That’s how wealth spreads, sure it might not spread evenly, but does spread predictably to those who participate. We all have the choice to participate but most of us choose not to.
Risk vs. Reward (Volatility Isn’t Loss)
It’s easy to see a stocks price chart dipping and think, “I’ve lost my money!”
But unless you sell while it’s down, you haven’t lost a thing. You just own something that’s temporarily worth less, like your house when property prices dip. How many people even notice when their house price dips? Imagine buying a house and checking its price every day. Seems absurd, but we do it with other property like shares.
That movement in price, is called volatility, not loss. The stock market moves like a rollercoaster, but the track almost always slopes upward over time.
Every stock market crash in history, from the dot-com bubble to 2008 has eventually been followed by recovery and new highs. Partly due to the constant currency debasement that we’re all used to living in and affectionately refer to as ‘inflation’ as we laugh in overpriced baked beans and think about becoming vegetarian because meat’s too expensive now and it’s healthier anyway. Isn’t it?
That’s why investors talk about time in the market rather than timing the market.
Because no one can predict the drops, but everyone benefits from the climb. Every investor knows that their money needs to be in assets, or it melts, so they pretty much have no choice but to accept market crashes to a degree anyway.
The Magic Ingredient: Compounding
Here’s where things get even more interesting and this is the real power of ‘time in the market’ pulling it’s weight for you.
Compounding returns mean your money earns returns, and those returns start earning returns too. It’s growth on top of growth. And no, you don’t need to be receiving dividends for this affect to happen.
Example:
If you invest £200 a month and earn an average of 7% a year, in 30 years you won’t just have £72,000 in deposits. You’ll have around £227,000. The extra £155,000 didn’t come from working harder, it came from time and compounding.
It’s the most powerful tool in finance, and it only works for people who start. The difficult part is starting, because for many years you won’t feel the affect of compounding but after 5-10 years you should start to notice it working for you. Try a compound interest calculator and look at what it does after 20 years!
So No, Investing Isn’t Gambling
- Gambling is designed for you to lose with the odds are stacked against you.
- Investing is designed for you to win, the system rewards patience and ownership.
Yes, prices move up and down. But underneath that noise, real companies are creating value every single day. Every new product, every innovation, every growing business is what drives markets upward over time. Owning those companies is how you build wealth.
In summary
Saving keeps your money safe-ish, ‘safe’. Investing helps your money work.
As a beginner your goal shouldn’t be to chase quick profits or to outsmart the market, it’s to become a quiet owner in the global economy, and let progress do the heavy lifting. As your profits increase and your knowledge of investing, market cycles etc increases, you might branch out to other things but really, just getting yourself in the market should be a priority.
In the next part, we’ll look closer at how that system actually works what drives stock prices, why crashes don’t matter, and how you can use history to your advantage.
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