Investments and business are similar in that both need you to commit some money in anticipation of future profit or benefit. The key difference, however, is that in business, you are actively involved in management, while in investments, your role is more passive. An investment turns into business when you begin to control the operations; the opposite is also true.
Say, for instance, you had to choose between owning a business versus being a shareholder. If you chose to run a business, you would need to be actively involved in its day-to-day operations, manage it, and interact with customers; essentially, create value and then sell it to your target market for a profit. On the other hand, if you were interested in acquiring public equity, you would give your cash to a stockbroker who then acquires a number of stocks for you. Without too much interference from you, your shares would earn you money.
Both operating a business as well as investing have their advantages and disadvantages. Starting a business offers you independence because, theoretically, you are your own boss and can pick your own hours. In reality, though, a business will require a lot of your time, especially if you are just starting out. Added to this, there is also the stress of dealing with your competition, handling employee issues, and stakeholder management.
Starting and running a business is also capital intensive, requiring an entrepreneur to put in their personal savings, raise equity or take on debt, even though it could take several months or even years before the business breaks even.
In contrast, investing in equity may sound easier, but this is not necessarily true. With any investment, there is a risk that you will not get the anticipated returns due to volatility and market fluctuations. The greater the return, the higher the risk. This is because the performance of the firm you are investing in and the market are out of your control. Another challenge is that investors often expect a quick return; in reality, to get the best out of any investment, one needs to take a long-term view. After carefully doing your market research, you then proceed to select the firms whose long-term outlook is positive.
Read more: Advantages Of Investing In Money Market Funds Over Banks
This is where fund managers come in place. These are professional firms with expertise in the investment field. Fund managers collect money from many different individuals and organizations and invest on their behalf. They diversify and invest in many sectors, reducing the risk of your money as an investor suffering a loss. The fund manager monitors market, and economic trends and tracks securities in order to make informed investment decisions.
Fund managers are also affordable and enable you to access investments you would not have. A government bond in Kenya requires a minimum of Ksh. 100,000 with top-ups of at least Ksh. 50,000. One can invest in a money market fund with as low as Ksh. 5,000 with top-ups of a thousand shillings. The money market fund may then be invested in treasury bills, among other venues.
All said and done, having a blend of both will always come in handy. Quoting Warren Buffet, “Being a businessman makes you a better investor, and being an investor makes you a better businessman” This is because most businessmen limit themselves to their own field, and most investors don’t really think about businesses which is ideally the underlying asset of their investment.
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