What is the difference between saving and investing?
Saving refers to putting money away for a rainy day, with the intention of using it at a later date. Usually savers put their hard earned money into cash products, such as a savings account in a bank. In this case, the bank will pay the depositor (the person who puts money into the bank account) interest on the deposit. However, with most banks savers tend to earn very little on top of the amount they put in, because we live in an era of low interest rates.
Once a saver has saved up a big enough pot, they can decide to try to really grow their savings through investing, which is when a person chooses to put that spare cash into financial instruments instead, such as stocks and funds. A broad term used to describe all of these purchasable instruments is ‘investment vehicles’. Savers do this in the hope of making a bigger financial gain over time as their investment grows in value, compared to a regular savings account, where financial gains may be slim.
Compared to putting money into a savings account, investing can entail some more risk. This is because the prices of purchasable instruments (otherwise known as assets or securities, like stocks) have a tendency to fluctuate in value more often. Fluctuations are referred to as ‘volatility’. However, some assets are generally considered safer than others. A bond, for example, is debt issued by a government which investors can purchase. Since bonds tend to be insured by a government, they are generally safer than shares, which are tied to the fortunes of individual companies.
While savings accounts offer more security, investing in stocks can be far more lucrative. In the UK for example, between 2007 and 2017, the Bank of England (the central bank) kept interest rates at 0.25%. Savers who put away £15,000 in cash in 2007 would have earned an average of only £691 on top of their deposit, according to figures from Fidelity. In strict contrast, an investment of £15,000 in the FTSE All-Share index in 2007 would have been worth £25,270 10 years later. The idea with investing is that savers take a little more risk to generate a stronger return compared to traditional forms of saving, by picking suitable instruments to invest in which are likely to perform well into the future.