If this caught your attention, then chances are you’re interested in learning how to invest your money and make it grow. The word ‘investing’ can sound like a complicated concept to understand, but all it really is is the act of allocating resources, like money, to make a profit in the future.
In fact, investments can be seen wherever you go. Real estate, stocks, designer bags, cryptocurrencies, businesses - all these can be considered investments in one way or another. Why do people do this? Because they expect these assets to benefit them in the future.
But, it is also important to note that not many people invest because it entails risk. Risk means having exposure to uncertainty, including financial loss. That’s what separates investing from saving or keeping money. A certain degree of risk is necessary to achieve a certain degree of reward.
Although there are many things one may invest in, there are two main approaches to it.
Active investing is an aggressive approach to investing with the goal of making as much returns as possible. It usually entails constant monitoring and the buying and selling of individual assets which may involve more analysis and chart-reading. One example is buying cryptocurrency for $5 today, and selling it for $7.50 next year, giving a 50% profit.
Passive investing, on the other hand, is a conservative approach to investing with the goal of matching or outperforming an index or benchmark’s returns. It requires less buying and selling; less effort. Money that is passively invested is money in it for the long term and usually requires a buy-and-hold mentality. An example is buying Bitcoin in 2020 and not selling it until 2030.
Both active and passive investing strategies entail risk to the investor. In most cases, the investor is never guaranteed any return. Given that, what good reasons might an average Filipino have to still want to invest their money?
Inflation is simply the rise in prices over time. Did you know that diesel fuel in the 1990s cost less than 8 pesos per liter while it cost up to 100 pesos per liter in the year 2022? Over time, the negative effects of inflation have compounded and decreased people’s buying power. Generally, investing goals are centered on the minimum requirement of beating inflation so an investor’s money can grow faster than inflation and preserve wealth.
Other people invest to generate more wealth and achieve their financial goals. People usually invest early to grow their money exponentially because the things they seek to buy are generally too expensive and would take too long to buy—like sports cars, houses and lots, luxury watches, or the latest gadgets. Unless a person’s income is large enough, earning returns through investing would enable people to reach these goals more quickly.
A lot of people aim to retire early, quit their jobs at a certain age, and take life easy from there. Investing can help people achieve this by reaching a certain amount that would sustain their lifestyles without a job.
People also invest for passive income. In the world of investing, there are investments that not only have the potential to increase in value but can also ‘reward’ you money based on a certain time interval in the form of dividends. Having passive income will help one’s investments grow even more if reinvested.
Investing attracts many people because of the potential to make higher returns versus what banks can offer. In the Philippines, on average, traditional banks would offer a 0.1-0.25% annual return on your savings. That means if you have Php 10,000 in the bank, you’ll only receive Php 25 after one year - not that attractive, right?
Now when it comes to the financial markets, there is a short-term approach to generating wealth - this is what we call trading.
Trading involves buying and selling assets in a shorter period of time. It is much more dynamic than active investing, which also means more volatility may be involved.
Traders choose to trade for quick profits. In a good market, trading can easily make you money. However, trading can also make you lose money quickly without the proper skill set and discipline.
With quick profits comes the ability to compound money quickly. Traders who manage to reinvest their profits from their trades can exponentially grow their money and probably meet their investment goals much faster.
One of the main benefits of trading is taking advantage of market volatility. Financial markets, especially cryptocurrencies, move a lot within a period, even just for a day. How much these market prices move is described as volatility. Traders can take advantage of those moves by quickly buying or selling when there’s volatility.
So which is better, investing or trading? The answer to the question always depends on the person, as both styles have their own pros and cons.
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Which is for you?
When approaching the markets, it doesn’t have to be one or the other. You can start as both an investor and a trader. You can dedicate a portion of your portfolio to each activity. In this way, you will be able to gain the best of both worlds and have a better perspective on which style works and doesn’t work for you.
Another factor to consider is your personality and commitment. Generally, if you are risk-averse or not a risk-taker, investing might be a more viable path for you. On the other hand, if you can afford and are willing to take risks, you may consider trading first.
There is more commitment needed if you want to be a trader. Your priorities should fit your style and not the other way around. A fresh graduate from college will likely have more commitment and fewer priorities than someone who is married and has a full-time job.
Making money either through investing or trading may look simple, but it is not easy - there is no reward without risk. When it comes to both styles, one is not necessarily better than the other. Each has its benefits and drawbacks. As long as you are willing to properly learn the fundamentals as an investor, trader, or both, you’ll be able to grow your portfolio in time