There had been a significant increase in investors from the past years. Each of these investors has their own different techniques on how to conquer the market. However, there are 2 major investment approaches: active and passive investing. In this article, we would discuss about the difference of these 2 approaches and which one of them is more appropriate for you.
Investors of this kind are the ones who prefer to make money fast by taking advantage of short term price fluctuations. They usually read everything about investing, study the stocks and their trends, and subscribe to newsletters and magazines in order to be updated on the latest market news. They also regularly read financial statements, economic analysis and reports. These investors treat investing as a passion, hobby, or even a career.
Active traders usually prefer stocks that are rising and promises accelerated earnings, presumably from newly discovered products and innovations. They don’t hold on to stocks for a long time, rather they seek to buy and sell stocks with the intention to make money from short term price movements. They can be associated with “day trading” as they usually make multiple trades during a single day.
The good thing about active traders is their ability to hedge on losing trades by short selling and other strategies. They also practice risk management as they can easily get out of investments when the risks start to get out of hand.
Although active traders have the potential to make money quick, they are also subject to losing just as well. The hardest part of being an active trader is the emotional challenge it brings, since it involves gaining and losing money often, resulting to undisciplined transactions without following a strict trading plan.
This type of investing aims to maximize returns on the long run by using a “buy and hold” approach. Passive investors usually create a plan, researches for growth stocks, invest their money, and then patiently wait for some years until their stocks make a significant return in the future. The idea of passive investing is not to make quick gains, but rather to build slow, steady wealth over time.
Passive investors believe that by simply waiting, they can overcome the ups and downs of the market until they can settle on higher returns. They rely on the fact that despite of some crashes in the market; it has always gone back up over time.
When done correctly, passive investing can bring a lot of profits. It can even possibly multiply their initial capital, rather than a series of small gains. It also eliminates the emotional problems that comes with having to check on the market everyday. This is because temporary downturns in the market has little to no effect on passive investors.
However, the challenge in passive investing lies on recognizing growth stocks – stocks that will make consistent increase of value in the future. Even though passive investors don’t monitor the market often, they still need to periodically re-evaluate the performance of their stocks. They also need to have the presence of mind to respond to long-term market changes.
Which one is for you?
Choosing which investment approach to take depends on your personality and preferences. Those who are eager for quick profits and would like to generate fast income, no matter how small the gains, are more inclined to become active traders. While those who prefer to save up for retirement or generally want to purchase more expensive luxuries in the future should opt for passive investing.
Learn more about the importance of financial investing.
No matter which approach between active and passive investing you choose, make sure to stick to your plans and follow initial strategies. For active traders: do not get your emotions get in the way; while for passive investors: ignore the temporary downturns in the market. Keep yourself disciplined and you’ll be able to harvest your profits in no time.
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