Saar Pilosof Shares The Difference Between Saving and Investing
There are some similarities between saving and investing, but there are also some subtle differences. If you are new to investing, you may be tempted to believe that having a savings account at your local bank is the same thing as investing your money but it really isn’t.
In simple terms Saar Pilosof says investing is the process of putting your money to work for you. In other words, when you invest in something, you put up some money with the expectation that you will make some type of return on your money, known as investment returns. Saving is similar but with saving, the capital that you put down is guaranteed to be returned to you whenever you need it.
With investing, on the other hand, you stand the risk of losing all or some of your capital and also the risk of making no returns. Let’s use a practical example to illustrate the difference between saving and investing.
Say you bought $1000 worth of Apple stocks at $100 per share on the stock market as an investment. A few months later, the price of the stock drops to $90 per share. This would mean that you have an unrealized loss of $10 per share because if you sold those stocks at that time, you would only receive $90 for each. On the other hand, if you hold those shares and the stock price later goes up to $120 per share, you would have made an unrealized gain of $20 per share. If you sold at that point, you would have made an actual gain of $20 per share.
Let’s say you put that $1000 in a savings account instead. The bank would pay you some interest on that money depending on how long you keep that money in the account. There is very little risk of losing that $1000 but the returns that you could gain would be minuscule compared to what you could earn by investing those funds in the stock market.