The differences between active and passive trading are similar to the differences between the actions of one person and the whole group; or you can imagine that active trading is a bet on winning the championship, and passive trading is a part of the profit from the collective sale of tickets and souvenirs. Each of these strategies has certain advantages. When investing passively, a significant profit requires a long wait – provided that the share price moves in the predicted direction. However, if we are talking about highly volatile stocks, from which we do not expect a sustained growth, short-term positions, i.e. active trading style may be more effective.
What is Active Trading?
Active traders can sometimes seem like fanatics. They read about investing everything they can reach, study stocks, subscribe to magazines and newsletters. Their motivation can be different: some traders want to earn quickly, others want to beat the smart guys from Wall Street. Whether it’s an ego or a thirst for enrichment, it’s a favorite hobby or even passion for active traders. Such investors read financial statements, market forecasts, analyst reports and articles. They know the names of the world’s best economists and regularly read The Times and The New York Times.
An active trader buys and sells stocks to make a profit in the short term. As a rule, they do not hold individual shares for months and years, and they are not interested in long-term economic trends. In addition, an active trader who wants to buy and sell paper within one day is called a day trader.
An active intraday trader is characterized by three attributes:
- Time frame. Usually a position is opened and closed within one trading day.
- Target. An active trader tries to profit from day fluctuations in the price of a particular share. To predict these fluctuations, he does not rely on fundamental factors, but on technical analysis.
- Volume. An active trader makes several deals during the day.
A day trader can earn (or lose) significant money, but has to devote much more time to trading assets than most long-term investors. Active traders prefer growing stocks and are looking for signs of future breakthroughs. For example, it may be a company planning to launch a new promising product on the market. There are many factors influencing the choice of paper: here and the dynamics of the share price, and the market behavior, and the company’s income.
An active trader does not count on dividends. In addition, he usually does not buy preferred shares, as their advantages are more profitable for a long-term investor. If a trader want to succeed in Trading Assets – FINMAXBO is one of the best places to start.
What is Passive Trading?
This type of trader is usually interested in investing his funds, but does not want to spend all his free time studying financial reports, market reports and even weather forecasts. Investors of this type are not interested in luck. Often they just trust the broker to invest their money. Passive trader creates a plan, studies stocks, invests – and patiently waits for profit. He assesses the value of the company, its assets, the level of debt and financial health. He also studies the market in which the company and its competitors operates. He usually does not look for quick benefits. They do not touch the portfolio if the losses do not exceed some predetermined level – usually 10%. If this happens, they sell shares.
Passive trading is based on the fact that the market is always growing. If a person doesn’t have a burning interest in the stock market and just wants to save up for an old age, a passive strategy is the best choice. In the long run, passive trading can bring a decent income with minimal time spent. Two aspects are crucial for this strategy:
- The choice of stocks with good potential for stable growth over the entire investment period.
- Creating a diversified portfolio so that if one part of the market falls, the other shares will compensate for the losses.
To achieve this goal it is better to use hedging instruments, such as bonds, which tend to rise in price when the share price falls.
Advantages of Passive Investment
The main advantage of this strategy is that, with the right approach, it can bring a serious profit, while each of the short-term deals will bring a rather limited profit. For example, if the automotive industry is in decline, a passive trader can buy a lot of shares in an automotive company that he expects to regain its position and wait for years before it happens, after which the shares can triple, say.
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