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 a business when you begin to control the operations; the opposite is also true.
Say for instance you had to choose between running 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 and all stakeholders to create value 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 a return when they go up in price (capital appreciation), or when the company pays dividends.
Both operating a business and 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, which would require an entrepreneur to put in their personal savings, raise equity or take on debt, despite the fact that it could take several months or even years before the business breaks even.
In contrast, investing in equity may sound like the easier route, 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. 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 when in reality, to get the best out of any investment, a long-term view is necessary. After carefully doing your market research, you then proceed to select the firms whose long-term outlook is positive.
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 organisations and invest on their behalf. They diversify and invest in many sectors thereby reducing the risk of your money as an investor suffering a loss. The fund manager monitors market, economic trends and track 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 Kshs 100,000 with top ups of at least Kshs 50,000 whereas in a fund manager, say Cytonn Investments, one can invest in a money market fund with as low as Kshs 5,000 with top ups of a thousand shillings. The money market fund may then be invested in the 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 make you a better businessman.” Each pursuit teaches lessons that are applicable to the other.
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