Before you start investing or trading in precious metals, you need to understand the concepts of saving, investing, trading, and speculating; otherwise, the financial pitfalls could be very great. The differences aren't just in where your money is but also why and in what manner.
Right now, millions of people live with no savings and lots of debt, which means that they are speculating with their budgets; retirees are day-trading their portfolios; and financial advisors are telling people to move their money from savings accounts to stocks without looking at the appropriateness of what they're doing.
Make sure you understand the following terms — knowing the difference is crucial to you in the world of precious metals:
- Saving: The classical definition of saving is "income that has not been spent," but the modern-day definition is money set aside in a savings account for a "rainy day" or emergency. Ideally, you should have at least three months' worth of gross living expenses sitting blandly in a savings account or money market fund. Although precious metals in the right venue are appropriate for most people, including savers, you need to have cash savings in addition to your precious metals investments. A good example of an appropriate savings venue in precious metals is buying physical gold and/or silver bullion coins as a long-term holding.
- Investing: Investing refers to the act of buying an asset that is meant to be held long-term (in years). The asset will always run into ups and downs, but as long as it's trending upward (a bull market), you'll be okay. Investing in precious metals may not be for everyone, but it is an appropriate consideration for many investment portfolios. The common stock of large or mid-size mining companies is a good example of an appropriate vehicle for investors.
- Trading: Trading is truly short-term in nature and is meant for those with steady nerves and a quick trigger finger. There are many "trading systems" out there, and this activity requires extensive knowledge of market behavior along with discipline and a definitive plan. The money employed should be considered risk capital and not money intended for an emergency fund, rent, or retirement. The venue could be mining stocks, but more likely it would be futures and/or options because they are faster-moving markets.
- Speculating: This can be likened to financial gambling. Speculating means making an educated guess about the direction of a particular asset's price move. Speculators look for big price moves to generate a large profit as quickly as possible, but also understand that it can be very risky and volatile. A speculator's appetite for greater potential profit coupled with increased risk is similar to the trader, but the time frame is different. Speculating can be either short-term or long-term. Your venue of choice could be stocks, but more likely, the stocks would typically be of smaller mining companies with greater price potential. Speculating is also done in futures and options.
