It can be challenging to choose the best opportunity to use your capital when you have money to invest.
If you’re wondering if you should start a business or invest in stocks, the major considerations are the 3 elements of time, potential return, capital, skills needed and risk.
Over 15 years ago we wondered if we should continue to invest in stocks or start a business with our savings. 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 which can increase wealth while lowering risk.
Time Needed to Start a Business Vs Invest in Stocks
There are three important time elements both to start a business or invest in stocks.
Time to Produce Return from Small Business Vs Stock Investing
Getting profits from a small business can take years. While short term stock profits 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.
Time to Start a Business and See Profits
It can take months or even years to get a return from a small business. Many highly regarded public companies have taken years to generate profits.
For example, Federal Express wasn’t profitable for about 4 years.
And it took 9 years for Amazon to become profitable. (1.)
The exception to this lengthy time frame for a business is a small local consulting business. In this case, you can start getting income within weeks.
Your market will be limited but this can be a great way to get started and can lay the foundation for online expansion.
The time frame to generate small business profits depends on the model. You can click here to read my post where I explain the different kinds of online businesses.
Time to Invest in Stocks and See Profits
You can buy stocks and see a profit or a loss within minutes, but this is not the goal of long term investors, of course.
The amount of time it takes for long term investors to make money in stocks is based largely on two factors.
First, success depend 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.
More importantly, investing returns will depend on whether the market is in a bull market (as it usually is) or a bear market. This is based on the economic cycle for the most part.
Building wealth in a bull market is often easy and fast. For example, stocks, as represented by the S&P 500 index, could increase in value over 29% like they did in 2013.
Or the stock index could go down over 38% like it did in 2013. (2.)
But the plan to invest in stocks usually has a long term time horizon for most investors. Therefore, I often write that you’ll want to begin with an overall wealth plan that defines your goals and time frame before investing in stocks.
Time Needed in Managing Small Business Vs Stock Investments
It takes very little time to invest in stocks and manage them with a simple DIY investment strategy. Or you could hire a wealth manager or financial advisor to invest in stocks for you. (Click here to read my post on understanding your investments.)
But I would suggest taking some time to learn how to invest in stocks before investing whether you invest yourself or hire a financial advisor. (Click here for my post on the pros and cons of using a financial advisor.)
On the other hand, it can be a full time job to start a business. This completely depends on the model you choose when you start a business.
Potential Return from Owning a Business Vs Investing in Stocks
There are two elements to making money. One is income and the other is making money from gains. Let’s look at the potential for each of these from both starting a business and investing in stocks.
Income from Small Business Vs Stocks
Income relates to the profits generated after starting a business or investing in stocks. Business income can be unlimited.
On the other hand, stock income is received from stock dividends that are based on the company distributing profits.
Some stock investors, like me, sell covered calls against stocks they already own to increase income. (Click here to read my post Does Living Off Covered Calls Really Work?)
Wealth Building from Small Business Vs Stocks
Wealth building is associated with gains, specifically capital gains since your capital (wealth) increases when you sell an asset for a gain.
A business can be sold for millions of dollars. Even a small blog that makes money from advertising sells for 2 to 3 times net income producing a nice capital gain.
And of course, stocks can also be sold for a capital gain, which is the goal of most stock investors.
Note that the gain from stock sales is more diluted since there are thousands of owners (stockholders) vs only one or a few small business owners.
But which asset is more likely to have a capital gain; a quality stock or a small business?
Since you can buy stocks that have already been profitable for years, there is a greater chance of selling stocks at a gain vs selling a small business at a gain. Experience has taught me that this is true only IF you buy the stock at the right time during the economic cycle or hold the stock long enough to have gains when you sell the stock.
So, stocks have a higher probability of being sold for a gain vs a small business.
This is because most small businesses fail. Again, this is simply a part of the journey for most entrepreneurs.
But if you own the business, whether it’s a blog or the next Amazon, you have control of the factors that determine success. And your commitment to succeed is a huge factor in determining the success of your business.
The gain from the sale of a successful small business is almost always much greater after a shorter time than the gain that occurs from the sale of stocks.
In summary, there’s a higher probability of selling a stock at a gain but the ROI (return on investment) you can get from selling a small business is much 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.
Capital Needed to Start a Business
You can start an online business that reaches a global market for less than $50 now. This continues to blow my mind,
One of our online businesses that cost under $5,000 to set up (from outsourcing) was generating consistent multiple 5 figure monthly revenue within 15 months. And it had a very high profit margin.
I don’t share this to brag but to let you know the opportunity.
It’s entirely possible to set up a simple blog for under $50 and make passive income of $1,000 to $2,000 a month ad revenue within a year or two. And other revenue sources can double or triple income.
On the other hand, buying a franchise or opening a brick and mortar store can cost a million dollars and more.
There are many variables for required capital depending on what kind of business you start.
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, which I don’t suggest. This is opposite small business investment capital.
For example, by investing $100,000 in an S&P 500 based stock index fund, you can expect around $160 a month in income as of this writing. In this case, you’re hoping for capital gains since smart investors wouldn’t have stock market risk to make less than 2% a year.
Remember, capital gains occur during bull markets generally speaking.
Skills 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.
Of course, many readers at Retire Certain already have advanced skills that allow them to start a business more easily.
But you can invest in stocks in an index based fund nowadays making it very easy to get started.
The most important thing to understand when investing in stocks is how stocks rise and fall in relation to the economy. You’ll want to use this information to estimate the probability of your stocks generating the desired capital gains within your time frame, based on stock market history.
Stock investing is about using logic, historical data and math wisely to reach the goals outlined in your overall wealth plan. Click here if you want to read more about this in post entitled Ways to Reduce Investment Risk.
Risk from Starting a Business or Stock Investing
Most people feel like there are two factors at risk: time and money.
Time Risk to Start a Business or Invest in Stocks
The thing about time risk is that you learn from the time you spend on any endeavor. And that knowledge usually helps you build wealth in the future.
For this reason, I am going to discount time risk as it relates to your own time spent to either start a business or invest in stocks.
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.
It’s 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 possible.
On the other hand, if you’re investing in high quality stocks it is extremely unlikely, you’ll lose all your money even though they may drop in value after you buy them.
Summary for Start a Business or Invest in Stocks Post
These 5 considerations will hopefully help you decide whether to start a business or invest in stocks.
I personally like doing both by investing in stocks as opportunities present themselves. And we’ve found that small online businesses are still an incredible opportunity with almost no risk.
Owning a small business and having stock investments increases both income and capital gain diversification that lowers risk while building wealth.