Introduction
These days, some people are investigating how to make a profit. Generally, there is an image that investments are made by rich people, but ordinary people can also start with a small investment. It is a convenient activity in terms of getting money, but of course, there are also risks. In order to succeed in investing, people need to acquire the right knowledge.
Difference between investments and savings
Investments and savings are similar activities in terms of making money. However, there is a big difference between these two.
Investments
Future financial gains such as stocks, bonds, mutual funds, and real estate. These investments include the objective of achieving long-term goals (Ope, 2019).
Savings
People put money aside to save for future purchases and emergencies. It is said that it is ideal to save 20% of monthly income. Savings are always available, but in the case of fixed deposits, it may not be possible to withdraw the required amount easily (Ope, 2019).
The main difference between investments and savings
- Savings have lower interest rates than investments. Investments have high risks, but also high returns.
- Savings can achieve short-term goals whilst investments can achieve them in the long term. Investing takes time, but we can get big returns for our patience.
- Investments have various risks, savings do not. We may lose the money due to investments and interest rates may also fluctuate (Ope, 2019).
Effects of investment
- Beat inflation
It also increases the value of our money because we can get higher income returns in the long run (Farrington, 2015).
- Get rich
No one has gone bankrupt from investing. It is difficult to invest if we have enough money, but there are some ways to start investment with little money (Farrington, 2015).
- Do not have to work
The more people invest, the more interest they earn. So as long as the investment goes well, they won’t have to rely on working (Farrington, 2015).
- Be able to meet financial goals
We can achieve various goals, such as paying for our child’s school fees or buying a house. (Farrington, 2015)
In this way, there are many advantages of investment. We should create an investment plan that suits us to increase our income and stabilize the economy. (Farrington, 2015)
Investment risks
Investing may lose money when the prices fall such as securities, stocks, and real estate. (Thakur, 2019)
- Market risk
Loss of investment value due to economic events affecting the market.
- Equity risk
The risk increases when the market price of stocks falls because they are volatile.
- Interest rate risk
Interest rates can harm debt securities, so lower interest rates increase the market value of debt securities.
- Currency risk
Losses in foreign exchange investments can occur due to exchange rate fluctuations.
(Thakur, 2019)
- Liquidity risk
Inability to cash due to improper sale of securities. Low market liquidity forces investors to sell securities at lower prices, resulting in a loss of value. (Thakur, 2019)
- Concentration risk
If people invest in only one security, they will lose all their investment if its value drops. (Thakur, 2019)
- Credit risk
Default risk for bonds issued by companies and governments. Because the issuer of the bond cannot pay the interest or principal to the investor, it defaults. (Thakur, 2019)
- Reinvestment risk
Loss of high returns on principal and income due to low interest rates. For example, a bond that provides a 7% return has matured and the principal must be invested at 5%. (Thakur, 2019)
- Inflation risk
The loss of purchasing power because the return on an investment is lower than inflation. (Thakur, 2019)
- Horizon risk
A shorter investment period due to personal circumstances, such as unemployment, marriage, and childbirth. (Thakur, 2019)
- Longevity risk
Extending the period of savings and investments. (Thakur, 2019)
- Foreign investment risk
Investors lose money when the situation in the country they invested in is bad. (Thakur, 2019)
Conclusion
Investment is very convenient, however if people do not research correctly and devise a method, they will not be able to make a profit and there is a possibility that they will lose money. By understanding that there is risk in investing and continuing for a long period of time, we will be able to obtain higher profits.
References
Ope (2019). The Difference Between Savings and Investments. [online] Cowrywise Blog | Get simple financial education. Available at: <https://cowrywise.com/blog/savings-investments-difference/#:~:text=Savings%20are%20best%20for%20short> [Accessed 27 October 2022].
Farrington, R. (2015). 5 Benefits of Investing. [online] The College Investor. Available at: <https://thecollegeinvestor.com/16912/5-benefits-of-investing/ >[Accessed 31 October 2022].
Thakur, M. (2019). Investment Risk (Definition, Types) | What is Investment Risk? [online] WallStreetMojo. Available at: <https://www.wallstreetmojo.com/investment-risk/> [Accessed 1 November 2022].
