Starting a business and investing in stocks are very two different things. However, they have a lot in common. They’re both great ways to generate wealth and create financial freedom for yourself. From a financial perspective, either one can be more successful than the other and both have their own risks.
In this article, we’ll compare starting a business vs investing in stocks — and cover the advantages and disadvantages of each to help you decide which is right for you.
Starting a Business
First, we’ll look at starting your own business. Starting your own business is perfect for people with a dream to chase or that love to work and get things done. Let’s start by seeing how building a business is different from investing in stocks.
How Is Starting a Business Different from Investing in Stocks?
Starting a business is the perfect endeavor for a certain kind of person. While most people will invest in stocks in their life, either through a 401(k), an IRA, or another financial product, most won’t start a business.
The reason why is because starting a business takes a lot of work. While investing is more “set it and forget it,” building a business from the ground up is very involved. Most people that successfully start a business state that it takes more work for less reward than a regular 9 to 5 job in the beginning.
When building a business, it is not uncommon to work more than 8 hours per day. However, once the business is established, many business owners find themselves working less than they would at a regular job since their employees do it for them.
Another way that a business differs from investing is the risk. While stocks are certainly risky, and many have lost greatly from them, they are generally less risky than starting a business. With a business, you might have to invest a lot of capital or take out a loan with no guarantee that it will succeed. If it doesn’t, you won’t get that money back.
Owning a business is like having a stock portfolio with one stock in it. While all of your eggs are in one basket, you have complete control over that basket and its management.
Building your own business is better for people that have a clearly defined goal or are entrepreneurial-minded. Some people are wired to want to build something, to take on a great challenge, to take risks; these people are perfect for starting a business.
What Are the Advantages of Starting a Business vs Investing in Stocks?
There are several clear advantages to starting a business rather than investing in stocks.
The first is the ability for financial gain. While investing can make you very rich, it generally can’t make you rich as quickly as a business. The richest people in the world are business owners, not investors. Even Warren Buffett has largely made his fortunes from Berkshire Hathaway.
Additionally, investing often takes time. It’s pretty unlikely that you will turn $100,000 into $500,000 with stocks in a few years. It can be done, but most don’t get that great of a return. However, with a business, you can. It is still difficult, but it is more common.
Another advantage of building a business is that it doesn’t always require the funds that investing does. While many businesses do require a lot of capital to start, many don’t. In today’s age, lots of young people have started online businesses and found great success with limited funds. Businesses can also get loans and rent equipment or other facilities to start.
While you can start an online business with less than $1,000, investing with $1,000 isn’t likely to get you very far.
What Are the Disadvantages of Starting a Business vs Investing in Stocks?
One of the main disadvantages of starting a business vs investing in stocks is the time and effort that it takes. While it can certainly take a while to research a company to invest in or read about investing, the barrier to entry is generally lower.
Starting a business may require you to work for little to no money at times just to get the business started or keep it afloat. Your time is not tied to your hours. So, you may have to spend a few weeks solving a random problem that won’t make you money but is necessary to avoid failure.
Furthermore, starting a business has no guarantee. Investing doesn’t have any guarantee either, but at least there is a greater likelihood of success. With a business, you may have to work for months building a website, establishing an LLC, learning how to file taxes as a C corp, etc., without any guarantee that you will ever make a dime from it.
Next, starting a business can require a lot of knowledge or expertise. For example, if you want to start a jewelry store, you can’t expect to make it without any understanding of the jewelry industry.
At the bare minimum, you’ll have to learn the ins and outs of how the industry runs; as well as the differences between stone quality, all of the different stones popular on the market, how to advertise, how to source products, and more.
Last, is the competition. Business is a very competitive and often, downright cutthroat field. When you’re investing, you’re typically only in competition with yourself — at least in any real sense. When you run a business, however, you operate in a field with limited occupancy.
You may start a family-run grocery store in a small town and do well for years. Then, one day, a billion-dollar investing conglomerate decides to put a Walmart square in the middle of town. Now, half of your customers stop coming to you — and you go under. If you think this is far-fetched, you may not be ready for business. This happens every day and always will.
Investing in Stocks
Now, we’ll take a look at investing in stocks as a means of building income and wealth. Once again, we’ll begin by looking at how investing in stocks is different from building a business.
How Is Investing in Stocks Different from Starting a Business?
Investing in stocks is quite different from building a business. It is a much more passive way to build income and generally carries less risk.
First, investing in stocks can be done with little to no work. With a 401(k), ETF, or similar product, you can just put your money in and let it do its thing. When you run a business, however, you must work endlessly to make it succeed. It takes a monumentally greater amount of time spent working to make any kind of money from it.
However, investing usually takes longer to make the same amount of money that you would from a successful business. It can take more than ten years to double your money investing; but with a business, it can be done very quickly.
Another difference is your control over your investment. While you have very much control over your own business, you cannot change the way your stocks’ companies are managed. At the end of the day, you have no control over the share price of your stocks, only your investment in them.
What Are the Advantages of Investing in Stocks vs Starting a Business
There are several advantages to investing in stocks rather than starting a business.
First of all, it is less risky. While most businesses fail over the long run, most portfolios will succeed. It’s true that the stock portfolio, like the business, will usually suffer during an economic downturn.
However, it will almost always come back in the long run if it’s invested in sound companies.
Second, investing in stocks has a lower barrier to entry. While learning about stocks can greatly increase your profits, you can start with little to no knowledge and still do well by investing in blue chip stocks.
Next, investing can be passive. While there is never truly passive income in this world, investing is pretty close. Like with anything, you’ll have to spend some amount of time checking on your investments and looking for new ones; however, investing likely won’t take time out of each one of your days.
Many people find a good investment advisor, hedge fund, or other professional and spend little to no time monitoring their investments. Yet, they get wonderful returns.
Others decide not to rely on another person and spend a lot of time learning about investing.
However, they still usually don’t have to work very hard to keep their investments afloat. They can take a break anytime they want to and not have to worry about their investments suddenly crashing.
This is not the case with business. Let’s take a restaurant, for example. Unless you happen to know a great chef who wants to help you build it, you’ll need to have culinary experience and education. Even then, you’re one chef in a sea of tens of thousands — all with the same dream.
What Are the Disadvantages of Investing in Stocks vs Starting a Business
One of the main disadvantages of investing in stocks vs starting a business is the capital required to start. It is much easier to turn $15,000 into a six-figure income by starting a business than investing in stocks. That being said, it’s still harder to make a profit at all with a business than with stocks.
Another disadvantage for some is the fact that you aren’t able to make a great impact on the world by investing. If you’re someone that would like to help your community or the world while making your financial dreams come true, starting a business is what you want to go for.
For many, the process of starting and running a business is the whole reason why they do it. Since building a business is difficult, it can bring with it a tremendous sense of accomplishment.
Finally, as stated earlier, you have more control when running a business. When you invest in the stock market, you are investing in companies that you have no ability to manage or control. You must try to determine if they are well-run or not.
When you run a business, you have total control over the way it is run and the choices the company makes. If you are an expert in your field, it may be far more comfortable for you to invest in yourself and your own abilities than some unknown company.
How Are Starting a Business and Investing in Stocks Similar?
You may look at this article and think that investing in stocks and building a business have nothing in common. However, the two have many similarities. The following are reasons why you should get into one of them regardless of your choice.
First, they’re both great ways to make money. While business is more active than investing in the stock market, they have both made many fortunes. Both are two of the most common ways to become a millionaire — despite their differences.
Another similarity is that they both require financial literacy. When investing, financial knowledge is very important to everything you do. From analyzing companies' financial reports — to understanding the intricacies and terminology of the stock market, you must understand financial concepts.
Furthermore, when running a business, it is imperative that you know how to manage money and make important financial decisions. One of the most common reasons for a failing business is the mismanagement of funds.
Whether you’re deciding if a new upgrade is worth it or if a person is entitled to a certain salary, you must be able to make clear, sound decisions or your business may go bankrupt.
Which Is Right for You?
At the end of the day, the choice comes down to a matter of personal preference. If you have always had a business idea that you are passionate about, then you might feel unsatisfied with investing.
Furthermore, if you’re looking for a way to quit your job but still want to spend most of your time working, building a business is probably a better option for you.
But, if you’re someone that is moving into retirement age and are hoping for a passive way to make money, investing is your best bet. Many believe that they will be able to make passive income by starting a business and then just sit back and watch the dollars roll in.
In most cases, this couldn’t be farther from the truth. In today’s age, there are many people that capitalize on this naivety and try to sell you on this dream. It’s just not the mindset for a business owner.
Much of this decision comes down to risk. Are you someone that doesn’t quite feel right when you take the safe route? Or are you just the opposite — a person who likes to avoid unnecessary risk and play the long game?
If you like to take big risks, then starting a business may be for you. However, be sure to do everything you can to mitigate the risks as much as possible.
On the other hand, you can invest in risky stocks like growth stocks and try to bet on the next big thing. If you guess correctly, your money can multiply by a hundredfold.
You can also plan your business out greatly and do a lot of research to mitigate risks as much as possible. So don’t let your risk tolerance dictate your decision entirely.
The main question you want to ask yourself when deciding between these two is: “Do I want to spend a lot of time building something from the ground up that might not give me much return in the beginning? Or do I want to take a safer route that is more about study and analysis or learning from a professional?”
Hopefully, by reading this comparison of investing in stocks vs starting a business, you have been able to decide which is best for you. If you can’t decide, you can always purchase a business that is already successful.