• Monday, March 04, 2024

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Choosing Between a Startup & Stock Market Investment

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By: Eastern Eye Staff

Warren Buffett’s famous quote, “Never invest in a business you don’t understand,” can serve as a guiding principle regarding where you invest your money and whether you choose to start your business or invest in the stock market. When you invest in stocks, you essentially hold a stake in a company, which differs from owning and operating your own establishment. However, there are parallels to explore in both scenarios. This article explores the distinctions between running your small firm and possessing shares in a publicly traded enterprise.

Owning Stocks vs. Owning a Business

Stocks, also known as equity, are instruments that reflect a claim to a portion of the ownership interest in a company. Owners of stock units (also known as “shares”) have a claim on the corporation’s assets and earnings in proportion to the number of shares they hold.

Many individual investors’ portfolios are built around stocks, which are mostly traded on stock exchanges and platforms like Tradingview. Government controls on stock trading are in place to safeguard investors against fraudulent practices. As of 2023, 18% of British citizens have invested in the stock market, making it the most popular choice.

Starting a venture involves many steps to get things organised. First, you come up with an idea for your business. Then, you check if that idea could work and write a plan. The person who starts a new establishment is called an entrepreneur. They take on the money-related risks of starting, running, and managing the business.

Entrepreneurs might want to start a small local firm where they’re the sole owner and dream of growing it into a big, international company.

Stocks vs. Business: Decision-Making Factors To Consider

When choosing between investing in stocks and starting a firm, you must consider several crucial factors. Here are some key decision-making factors:

Starting Funds

Starting and operating an owner-operated small company typically requires substantial money. You may need at least a year’s salary or even more to replace your former employment income.

In contrast, investing in stocks offers more flexibility. You can begin by purchasing mutual funds with as little as $50 or $100 and continue to invest regularly. Buying individual shares typically requires around $1,000 to start.

Risks and Considerations

Once you commit to a business, selling can be challenging or even impossible. Quick sales often result in significant losses, potentially locking you into that business for a long time.

Conversely, investing in stocks is more liquid. You can easily buy and sell with minimal commissions and tiny spreads. You can exit your stock investments with a slight loss if needed. While you should still be careful about what you buy, the commitment is not as long-term as with a business.

Diversification

Small business owners frequently lack diversification, as they are heavily invested in their businesses. They are essentially “all in.” In contrast, investing in stocks naturally provides diversification. You can spread your investments across multiple stocks, reducing exposure to any single investment.

Autonomy and Control

In the case of a small establishment, you have the opportunity to make critical decisions, but you also bear the responsibility for managing the enterprise. Your phone will ring when issues arise or when significant decisions are needed.

With stock investments, you don’t have to worry about managing the businesses you own shares in, nor do you have a say in their management. Your role is that of a shareholder without the day-to-day management responsibilities.

Market Gains

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Your efforts, whether through hard work, smart strategies, or good luck, can increase your profits. In certain situations, the potential for profit growth knows no bounds. However, profits might dwindle in other cases, particularly if you don’t put in the effort or have bad luck.

For stock trading, you aim to pick firms with the most potential for profit growth. This is made easier with the news feeds and insights on TradingView and other dedicated platforms for stock trading.

Liabilities

You might encounter liabilities that extend beyond your initial investment in your business. The worst-case scenario could involve financial obligations beyond your stake.

When you own shares, your liability is limited to the value of your shares. The most significant risk is that your shares may become worthless.

Liquidity

Selling a business often involves limited liquidity. It might take months to find a buyer, and you may not get the desired price. Customers might leave if you’re a crucial part of the establishment, and there can be substantial buy/sell spreads and legal fees.

Conversely, selling shares is typically more straightforward. You can sell anytime, knowing the price at which you can sell. The bid or ask spread is usually small, and the selling commission is minimal. Capital gains taxes apply to profits unless invested in a tax-sheltered account.

Asset Value

It’s often challenging for businesses to determine their precise market value. If you plan to operate the establishment long-term, their market value might be inconsequential.

With an investment portfolio, the market value is frequently in your face, updated monthly or even daily, and sometimes minute by minute as you check it online. This continuous monitoring can be both distracting and motivating.

Final words: Becoming Truly Wealthy

Many business owners may never achieve true wealth, but some certainly will. Similarly, only a few stock investors will become significantly wealthy through this method. However, those who start investing early, save diligently and invest aggressively have the potential to accumulate significant wealth as they progress in life.

Warren Buffett frequently references a key idea: “Investment is most intelligent when it is most businesslike.” To truly understand this concept, you should consider your ownership of stocks for what it is: a partial ownership of a real company. Instead of viewing yourself as merely a shareholder, which implies a temporary and fleeting ownership, think of yourself as a share owner — a part owner of the company itself. It’s also essential for business owners to strive for a deep understanding of your firm model. Consider your competitive position in the market and analyse how to operate. This level of insight can enhance your decisions and make your establishment thrive.

 

Eastern Eye

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