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Passive vs. active investing

TL;DR

  • Different investors have different styles of trading

  • Long term investors prefer passive trading while swing traders prefer active trading

  • Both strategies have their own advantages and disadvantages


Passive Trading


A strategy used by investors who believe that returns are positive in the long run and seek to stay invested throughout the years.


This involves buying and holding assets over long investment horizons with minimal trading. An example of a passive investment strategy is indexing, where an investor purchases an index linked to a benchmark (like the S&P 500) and holds it for a while.


With less frequent trading, passive investing is a cheaper strategy because of fewer fees and less time commitment. As previously mentioned, your characteristics should determine the type of investor you can be and for someone with not so much time, passive investing is a great strategy to build their wealth. This strategy also provides better after-tax results as investments held for longer periods of time are taxed less than ones held over a short term.


Active Trading


On the other hand, active investing involves frequent trades and more time commitment.


Active investors continuously buy and sell assets in hopes to exploit as many profitable trade opportunities. Since these investors are looking at short term profits, their analysis revolves around price movements and finding arbitrage opportunities.


The benefit of constant rebalancing is that your portfolio stays up to date with current market conditions and hence risk may be lower. However, with so many trades occurring, fees to maintain these orders are high and lots of brokerages require high initial investment to allow active trades. For example, Robinhood requires investors to have at least $25,000 in their trading account to trade the same security more than once in a day.