It is not an easy task to determine the best opportunity to fully exploit your valuable time and capital.
Putting money in stocks has for a long time been considered the best strategy to grow wealth.
On the other hand, following the explosion of entrepreneurship in the past decade and considering that most of the wealthy people made their money from a business, it seems wise to explore if you are cut out for business ownership.
If you have a sum of money and you are torn between starting a business using this money or investing it, then this piece is for you.
The common belief is that investment and starting a business usually go hand-in-hand and are similar to identical twins. As such, individuals often get confused trying to determine the path to take because they believe they are similar.
When you own stocks, it means you own shares in a business. As such, it is evidently different from owning your own business.
Starting a Business vs Investing in Stocks
Let us take a look at a comparison between starting a business versus investing in stocks:
1. Time Needed to Establish a Business Vs Invest in Stocks
There are two elements that one should consider when comparing starting a business to investing in stocks: the time it takes one to make money and the time taken to manage each endeavor.
Time Needed to Make Money for a Small Business
Making a profit from a small business can take an exceedingly long time. It could take months or years to register a return from a small enterprise.
Sadly, business owners are considered failures if their business doesn’t register instant profits. However, the reality is that even large corporations struggle for years to register profits.
However, with the advent of the internet, it is becoming easier to become profitable in a few months, taking into consideration the business model. For instance, a consulting business can begin bringing in income within weeks.
Time it Takes to Make Money in Stocks
There are two ways that one makes money through stocks: capital gains and dividends.
Dividend income is usually low compared to the capital that is needed to generate it.
However, it can begin trickling in a matter of weeks of purchasing dividend funds or stocks.
Capital gains are mostly the real goal for many stock investors.
Even so, you can purchase stocks and register a profit or a loss in a matter of minutes. Obviously, this is not what stock investors want.
Long-term investors take advantage of two factors when trying to make the most from their stocks.
One, they buy profitable stocks. Success in the stock market will depend on whether the stocks you purchase are profitable. However, nowadays, people prefer to buy index-type funds such as the S&P 500 and not individual stocks, which might make this point irrelevant.
Two, in conjunction with buying profitable stocks, returns in stocks are influenced heavily by if the market is in a bear or bull market, especially for index investors. Bull and bear markets depend on a number of factors but are mostly related to the economy. Building wealth in a bull market is relatively easier than in a bear market.
Time Needed to Manage a Small Business Vs Stock Investment
Investing and managing stocks will consume very little time when you have a simple asset allocation-based portfolio. Furthermore, you can seek the services of a wealth manager or a financial adviser to do the investing for you and this also reduces the required time.
On the other hand, starting a business and managing it can be a full-time job. However, the time it takes will depend on the business model that you pick when you start the business and your willingness to delegate tasks.
2. Money You Make from A Small Business vs Investing in Stocks
There are two main factors to making money in both scenarios: income and capital gains. Let’s dive in to see the potential for each one when starting a business or investing in stocks.
Income is usually gotten from the profits generated after investing in stocks or starting a business.
However, starting a business has an advantage over investing in stocks: income in small businesses can be in the thousands if not millions of dollars. On the flip side, stock income can be quite little compared to the income that can be gotten from successful small businesses.
Profits from Small Business Vs Stocks
It’s important to note that when a publicly owned company generates money, the income gained from stocks is very diluted. This is because there are thousands if not millions of owners (stockholders) compared to only one or a handful of small business owners.
Distribution of Business Profits for Small Business Vs Stocks
In both stocks and business, income is usually received from stock dividends depending on the company that is distributing the profits. For instance, profitable companies may choose to reinvest their profits, instead of sharing them among their shareholders via dividends. This is especially common in growth-type companies.
On the other hand, small business owners can decide to use their profits for growth or distribute them.
Wealth Building from Stocks Vs Small Business
We have looked at how income is generated from stock investing vs business. Wealth building via gains is another reason to invest. Wealth building is a result of generating capital gains as your capital grows when you sell an asset.
As such, wealth-building potential should also be a factor when deciding whether to invest in stocks or start a business.
Gains from Stocks Vs Business
Starting a small business will have an advantage over investing in stocks when considering wealth building. For instance, a profitable small business that one started a few years prior can be sold off for millions of dollars.
This cannot be replicated with a typical stock investment. Additionally, small businesses can be sold easily and the practice is common.
Shares of stock may trade constantly, but this doesn’t measure up to selling a whole business by an individual.
Trading Stocks for Capital Gains
It’s common to sell stocks themselves for capital gains and is the goal of many stock investors. In comparison to small businesses, stocks that are publicly owned are seldom sold as a whole to raise money for stock investors.
Instead of waiting for a public company to be sold, investors instead try to generate capital gains by selling funds or stocks for more money than they paid for them.
However, a rule of thumb to selling the stock for capital gains is that you only sell them IF you either bought the stock at the right time, that is, during the stock market cycle, and went through a successful proactive strategy, or you hold on to the stock long enough such that is generates capital gains when you eventually sell it.
Stocks Vs Business Profitability
One, let’s consider the company profitability factor. As one can purchase stocks that have been profitable for a number of years, there’s, therefore, a much greater probability of stocks becoming profitable compared to starting a small business and growing it to profitability.
Two, let’s consider the capital gain factor. Stocks often have a higher chance of being sold off for a gain compared to small businesses. This is because most small businesses fail.
In conclusion, there’s a higher chance that you will sell your stocks at a profit. However, the capital gain gotten from selling a small business that becomes successful is way higher.
3. Capital to Invest in Stocks Vs Start a Business
The capital needed to start a business versus investing in stocks varies extensively depending on the kind of business being considered. All stock investing is usually capital intensive unless the investor leverages options.
Capital Required to Start a Business
You can establish an online business that has a global market for little than $25. It’s possible to start a website for less than $25 and get a passive income of $1,000 to $2,000 a month drawing from ad revenue in a year or two.
On the other hand, you can buy a franchise or set up a brick-and-mortar store that will cost you half a million dollars or more and it ends up failing.
There are numerous variables that determine the required capital based on the kind of business that is being started.
Starting an online business can cost almost nothing while starting a local business can cost you hundreds of thousands of dollars. In contrast, setting up a small consulting or service-based business can require only money to make business cards.
Capital Required to Invest in Stocks
Getting into stocks can be very capital intensive, meaning that you require 100 percent capital unless you’re using leverage with options. High capital is a complete contrast of the capital required to start an online business.
4. Skills Needed to Start a Business vs Invest in Stocks
The skills required to start a business or invest in stocks differ greatly.
Generally, you need to learn more when starting a business than you do to start investing in stocks. For instance, you can get into stocks by buying an index-based fund, which makes it easy to start.
On the other hand, people who set up a business, bring in an employee, contractor, or partner who has the required skills to start and manage the business. This requires capital to pay them or you’ll have to give up equity in your business.
5. The risk from Starting A Business or Stock Investing
There are two factors to consider when it comes to risk: time and money.
Time Risk When Starting a Business vs Investing in Stocks
It will take you a lot of time to establish a business because you need to learn a lot and much has to be done before you can start a business. This means that this time is prone to get wasted. The principle on time risk is that you learn starting from the time you take part in any endeavor.
However, this knowledge can in turn help you to grow wealth in the future even if the enterprise doesn’t take off. Knowledge is usually an asset that can be exploited.
Investing in stocks, on the other hand, will take you less time so there’s less time risk. Furthermore, the knowledge obtained can also be exploited just as in starting a business.
Financial Risk to Establishing a Business Vs Investing in Stocks
The sum of money that you pump into any investment is always at risk. Therefore, we will be focusing on how likely you are to lose your money for either investing in stocks or starting a small business.
While there are many factors, you are highly likely to lose the money you invest in a small business as there is often a high failure rate. For this reason, it’s crucial that you set up a business using as little capital as possible. This is known as the theory of lean testing and is quite valuable.
On the flip side, if you invest in high-quality stocks, it is highly unlikely that you will lose all your money, though stock values may take a hit temporarily, after buying.
However, the offsetting variable is that as many small businesses nowadays can be started using little to no capital over the internet, a lot more money is at risk when put into stocks than with setting up a small business.
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Hopefully, these five considerations will help you to decide whether to set up a business or to pump your money in stocks.
As we have established, stocks oftentimes provide a solid, mostly passive investment strategy.
Online small businesses, on the other hand, can be a great opportunity to set up a business with close to no risk. Regardless of your option, you’ll get to increase your income and register capital gain diversification.
Bijay is an entrepreneur and start-up founder having more than 14 years of IT industry experience. He is the co-founder of TSInfo Technologies, a SharePoint development company.
A dedicated professional and very passionate about public speaking and also wrote thousands of technical blogs in various technologies. He also wrote a lots of blogs on entrepreneurship, investment, startup, business, manage money tips, etc.