Start a Business or Invest in Stocks: Which Is Better?

Risk Reward | Start a Business or Invest in Stocks It can be challenging to choose the best opportunity to maximize your valuable time and capital. Investing in stocks has long been considered the best strategy to build wealth. With the explosion of entrepreneurship over the past decade and the fact that most of the wealthy made their wealth from business, it makes sense to explore if business ownership has a place in your portfolio. The internet provides an opportunity for investors to start a business with little capital, too. The focus of this article will be comparing that opportunity to that of investing in stocks. Is it better to start a business or invest in stocks? For the amount of capital required, starting a business has high income and capital gain potential yet requires far more time from the owner; investing in stocks has limited income and capital gain potential but requires little time by the investor.  Over 15 years ago we wondered if we should continue to invest in stocks or start a business with our savings capital. In this post I’ll share what we learned since then from starting several online businesses and after investing in stocks for almost 40 years. As you’ll see below, I think it makes sense to start a business and invest in stocks, too, since they have opposite fundamentals that can increase wealth while lowering risk. The focus of this article is starting a local small business or an online business, not a business that requires a large amount of funding. It’s also important to note that when deciding whether to start a business or invest in stocks the driving factor is whether you want to generate income or a capital gain. At Retire Certain, the focus is generally on strategies that have the opportunity to both generate income and build wealth through capital gains. The factors that will be addressed in deciding whether to start a business or invest in stocks relate to time, profit potential, required capital, skills and risk.

Time Needed to Start a Business Vs Invest in Stocks

There are two important time elements for consideration in starting a business or investing in stocks; the time it takes to make money and the time it takes to manage the endeavor.

Time to Make Money from a Small Business Vs Stock Investing

Getting profits from a small business can a long time. While short term profits from stocks can take minutes, meaningful gains for long term investors usually take one to many years, depending on the economic cycle when you invest in stocks as explained more below.

How Does It Take to Make Money from a Business?

It can take months or even years to get a return from a small business.  While business owners are often viewed as a failure by themselves and others if their business isn’t immediately profitable, the reality is that even larger, highly regarded public companies have taken years to generate profits. For example, Federal Express wasn’t profitable for about 4 years. It took 9 years for Amazon to become profitable.  (1.) Many businesses take years to become profitable for various reasons. One can, however, start a small business nowadays and become profitable within a few months, depending on the model being used. Speaking from experience, one of our online businesses, for example, generated a significant profit within a few months because the timing and the niche were just right. A small local service based or consulting business can truly begin generating income within weeks. While the market is limited for a local business, this can provide an excellent way to test a market or income idea. It can also lay the foundation for expansion online and becoming a larger company. You may enjoy my related post explaining the different kinds of online businesses.    wealth plan

How Long It Takes to Make Money in Stocks?

Money is most commonly made from stocks in one of two ways; dividends and capital gains. Dividend income is very low relative to the capital required to generate it, as addressed elsewhere in this post. It can, however, begin flowing in within weeks of buying dividend stocks or funds. Capital gains are the real goal for most stock investors. Again, you can buy stocks and see a profit or a loss within minutes. This is not the goal of most stock investors, however. The amount of time it takes for long term investors to make money in stocks from capital gains is based largely on two factors.
Which Stocks Are Profitable?
First, success depends on whether the stocks you choose are profitable. Note that most people simply buy an index type fund like the S&P 500, not individual stocks, making this point less relevant nowadays.
Stock Market Cycles
In addition to choosing profitable stocks, investing returns are heavily influenced by whether the market is in a bull market (as it usually is) or a bear market, particularly for index investors. Bull and bear markets are based on various factors but usually, they’re related to the economy. Building wealth in a bull market is easy and can happen relatively quickly. For example, stocks, as represented by the S&P 500 index, can increase in value over 29% in one year like the index did in 2013. On the other hand, the stock index could go down over 55% as the S&P 500 index did in the late 2007-early 2009 bear market. The plan to invest in stocks, however, usually has a long time horizon for most investors. Click here to read my related post  How Will a Stock Market Crash Affect Me?

Time Needed in Managing Small Business Vs Stock Investments

In addition to the length of time it takes to begin making money after starting a business or investing in stocks, the time it takes to manage each endeavor is an important factor. It takes very little time to invest in stocks and manage them with a simple asset allocation based portfolio. Alternatively, you can hire a wealth manager or financial advisor to invest in stocks for you reducing the required time even more. Click here to read my related post on understanding your investments. The required time factor here relates to learning how to invest in stocks vs managing a stock portfolio. Learning how to invest is true whether you invest yourself or hire a financial advisor. This is true simply because you need to know how to invest to evaluate and monitor any financial advisor you hire. (Click here to read my related post on the pros and cons of using a financial advisor.) When compared to stock investing, it can be a full time job to start a business and subsequently manage it. The time required, however, completely depends on the model you choose when you start a business, and your ability to delegate tasks. Click here to read my related post with 115 businesses to start later in life.

How Much Money Can You Make from Owning a Business Vs Investing in Stocks?

As previously written, there are two core elements to making money; one is from income and the other is from capital gains. Let’s look at the potential for each of these from both starting a business and investing in stocks. Let’s start with income.

Income from Small Business Vs Stocks

Income is derived from the profits generated after starting a business or investing in stocks.

Profits from Stocks Vs Small Business

It’s important to remember that when a publicly owned company makes money, the income from stocks is extremely diluted since there are thousands or millions of owners (stockholders) vs only one or a few small business owners.

How Much Income Do You Get from a Business Vs Stock Investments?

An important advantage from starting a business that you simply don’t have with stock investing is this: Small business income can be in the thousands or even millions of dollars. On the other hand, stock income is paltry when compared to income that can be derived from a successful small business. The key word here is “successful” since most small businesses fail. The reality, however, is that many stock investments fail to make money, too. Let’s see how much income would be generated from a typical million dollar stock portfolio. This is measured by the yield. Large publicly traded companies in the US are represented by the S&P 500 index. While the yield changes, the average historical yield of the S&P 500 is about 1.8%. This means that a million dollars invested in the S&P 500 would yield around $18,000 a year, or $1,500 a month before taxes. Going back to the basics of stock investing, this is the amount of company profits that would typically be paid to common stock investors. It’s important to note, too, that the historical average PE ratio of the S&P 500 index is around 18. On the other hand, small online businesses can typically be bought for a PE of about 3, and you get to keep all the profits that you want to keep. This leads perfectly to the next point.

Distributing Business Profits for Stocks Vs Small Business

With both business and stocks, income is received from stock dividends based on the company distributing profits. Profitable companies may decide to reinvest profits, however, instead of distributing them to shareholders through dividends. This is very common, especially for growth type companies. Small business owners, on the other hand, can decide whether to distribute the profits or use them for growth.

Wealth Building from Small Business Vs Stocks

The above points addressed income from business vs stock investing. Income, again, is one core reason to invest; wealth building through gains is the second reason to invest or start an asset, such as a business. Wealth building is a function of generating capital gains since your capital (wealth) increases when you sell an asset at a gain. Therefore, wealth building potential  is an important factor in deciding if it is better to start a business or invest in stocks.

Gains from Business Vs Stocks

Starting a small business has a good advantage over investing in stocks from a wealth building perspective. Even a profitable small business that an individual started only a few years prior can be sold for millions of dollars. This simply isn’t going to happen with a typical stock investment. Also, small businesses can easily be sold and they commonly are. While shares of stock trade constantly, this simply doesn’t compare to selling an entire business by an individual. It’s worth noting here that most small businesses sell for about 3 times annual net income as previously written. This can produce a nice capital gain. Given the extremely low multiple for which online businesses sell when compared to other opportunities, however, it might make more sense to keep the business for income generation instead of selling it for a capital gain.

Selling Stocks for Capital Gains

Of course, stocks themselves can also be sold for capital gains, which is the goal of most stock investors. By comparison to a small business, publicly owned stocks are rarely sold as an entirety to the benefit of stock investors. Instead of hoping a public company will be sold, investors try to get capital gains by selling stocks or funds for more than was paid for them. Experience has taught me, however, that selling a stock for a capital gain is much more likely only IF you either buy the stock at the right time during the stock market cycle, follow a successful proactive strategy, or hold the stock long enough to have capital gains when you sell the stock. The reality is that as stock investors, however, we have zero control over stock market cycles and investing time frames are not always in our favor. We can, however, follow a successful proactive strategy that has proven itself. Most investors prefer to invest in stocks more passively, though.  

Business Vs Stocks Profitability

Aside from the above challenges, which asset is realistically more likely to result in a capital gain; investing in a quality stock or starting a small business? First, there’s the company profitability factor. Since you can buy stocks that have already been profitable for years, there is a much greater chance of stocks being profitable vs starting a small business and it becoming profitable. Next, there’s the capital gain factor, stocks have a higher probability of being sold for a gain vs a small business and here’s why: Most small businesses fail. This is simply a part of the journey for most entrepreneurs. If you own a business, whether it’s a blog or the next Amazon, however, you have control of the factors that determine success;  your commitment to succeed is a huge factor in determining the success of your business. In summary, there’s a higher probability of selling a stock at a gain but the capital gain you can make from selling a small business that became successful is exponentially higher. Watch the video below where I talk about the pros and cons of starting a small business.
 

Capital to Start a Business Vs Invest in Stocks

The capital required to start a business vs invest in stocks varies greatly depending on the types of business under consideration. All stock investing is capital intensive, however, unless an investor is using options.

Capital Needed to Start a Business

You can start an online business that reaches a global market for less than $25 now; this continues to blow my mind. We started a business online for under $2,000; it generated consistent multiple 5 figure monthly revenue within 15 months with a very high profit margin. I don’t share this to brag but to let you know the opportunity that exists when you start a business online. Stock investing simply can’t touch this as far as the potential opportunity with a strategy that requires no capital. It’s entirely possible to start a website for under $25 and make passive income of $1,000 to $2,000 a month from ad revenue within a year or two. Other revenue sources can double or triple the income. I regularly see examples of this. On the other hand, buying a franchise or opening a brick and mortar store can cost half a million dollars and more and it might fail. There are many variables for required capital depending on what kind of business is being started. Starting a small business online can cost virtually nothing while starting a business locally can cost hundreds of thousands of dollars. On the other hand, starting a small service based or consulting business can require only the money to buy business cards.

Capital Needed to Invest in Stocks

Investing in stocks is capital intensive, meaning it requires 100% capital unless you are an advanced investor using leverage with options. High capital is the complete opposite of the capital needed to start an online business. In the example above, you saw that a million dollars invested in an S&P 500 based stock index fund will generate about $1,500 income a month based on the past average yield. In this case, investors are hoping for capital gains, too, since smart investors wouldn’t have stock market risk to make less than 2% a year. Stock investors, however, get capital gains some of the time and they don’t at other times. In other words, capital is at risk for 1.8% income and capital gains potential which will probably occur but may not. Click here to read my post entitled Is Dividend Investing Worth it? or How to Know If the Stock Market Will Go Up or Down. 

Skills Needed to Start a Business or Invest in Stocks

The skills needed to start a business or invest in stocks vary greatly. I would say that you need to learn considerably more to start a business than you do to invest in stocks. For example, you can invest in stocks by buying an index based fund nowadays making it very easy to get started. Click here if you want to read more about this in my post entitled Ways to Reduce Investment Risk.  Many people who start a business, however, bring in a partner, contractor,  or employee with the needed skills to start the business and manage it. This, of course, requires the expertise to accomplish this; it also requires the capital (or profits) to pay someone or it requires giving up equity in the business.   wealth plan

Risk from Starting a Business or Stock Investing

There are two major factors when it comes to risk; time and money. Let’s address each.

Time Risk to Start a Business or Invest in Stocks

It can take a lot of time to start a business since a lot has to be learned and done in order to start a business. In essence, this time is at risk of being wasted. The thing about time risk is that you learn from the time you spend on any endeavor. That knowledge can help build wealth in the future even if the current endeavor doesn’t succeed. Knowledge is an asset that can be leveraged. For this reason, I am going to discount time risk as it relates to your own time to either start a business. The same can be said for investing in stocks. Investing in stocks, however, takes much less time as written previously so there is less time risk. The knowledge gained, however, can also be leveraged from investing in stocks just as it can from starting a business.

Financial Risk to Start a Business or Invest in Stocks

The amount of money you put into an investment is always at risk so what we’re really addressing is how likely it is that you’ll lose your money from either owning a small business or investing in stocks. While there are many variables, it’s more likely that you’ll lose the money you put into a small business since there is a high failure rate. Therefore, it’s important to start a business with as little capital as possible. This is very the theory of lean testing is valuable. On the other hand, if you’re investing in high quality stocks it is extremely unlikely you’ll lose all your money even though stock values may drop temporarily after being purchased. The offsetting variable, however, is that since many small businesses today are started with little to no capital given the internet, more money is at risk when investing in stocks than with starting a small business.  

Summary for Start a Business or Invest in Stocks

These 5 considerations will hopefully help you decide whether to start a business or invest in stocks. I personally like doing both and here’s why. Stocks provide a core, mostly passive investment strategy. Online small businesses are still an incredible opportunity with almost no risk. For us, they have been financially rewarding; they have also led to expanding our skills and even life enjoyment from the sheer achievement of creating something from nothing. Owning a small business and having stock investments also increases both income and capital gain diversification which lowers risk while building wealth.
  The best place to start is with my Ultimate Wealth Plan. You can get it here now.  Thanks for reading. If you enjoyed this post, please share it with others on your favorite social media.   Sources: 1. https://www.inc.com/drew-hendricks/5-successful-companies-that-didn-8217-t-make-a-dollar-for-5-years.html 2. https://en.wikipedia.org/wiki/S%26P_500_Index
The information on this website is for education only and is not to be construed as personal financial advice.