Saving, investing, trading – know how they differ

JULY is Savings Month in South Africa, so I thought I would revisit some basic concepts associated with taking a chunk of money you have earned and putting it into a financial product or instrument with a particular goal in mind.

- MARTIN HESSE

The terms we use, “saving” and “investing”, are often used interchangeably. But “investing” is also used interchangeably with another term, “trading”, further adding to the confusion for the layperson.

So let’s clear up the confusion:

• Saving: The act of putting away money - either a lump sum or, more practically, small amounts on a recurring basis so as to accumulate an amount to be used in the future.

• Investing: Buying assets such as company shares, bonds, or property that you believe have the potential to grow in value and/or provide a regular income.

• Trading: Speculating on the short-term rise or fall in the prices of higher-risk financial instruments, including shares, share derivatives, and currencies, including crypto, requiring active buying and selling.

As an example of how the terms are used interchangeably, we talk about “retirement savings” when we really mean “retirement investments”. This is because saving is normally associated with short-term objectives, whereas investing (not to be confused, in turn, with trading or speculating) is a long-term endeavour.

Ideally, you should be guided in these endeavours by a trusted financial adviser. But whether you use an adviser or not, you need to clarify your financial objectives, which can be divided into short-term and long-term goals.

Short-term goals are things like buying a car, having a deposit to put down on a property, or going on an overseas holiday. Your time horizon should not be more than five years.