The financial world has different types of people with different views and when you listen to them some might bring out hard financial topics from the world of macroeconomics, taxation and investment. One term which you may come across from time to time is Active and Passive Traders. So who are they and what is the difference between them?
Below we have discussed in detail what they stand for and where is the difference between the:
Who is an Active Investor?
Active Investor as defined by the experts means beating the market over a specific time period by the use different strategies. Two of the popular ones are:
- Security Selection
- Market Timing
The two above are very important for being an active investor. If your stock selection is good and you avoid the wrong ones then active trading is something where you could be successful at. You should be aware of the prospects of the particular choice of investing you go for so that it performs much better in future.
The other factor mentioned above i.e. Market timing means a lot as this is something that can make money or lose some. Therefore market timing is regarded as an important element for your investment where you enter into a position considering its low on valuations or is going climb up the ladders in the near term.
What is Passive Investing?
Now coming to passive investing it involves neither of the elements mentioned above. Passive investing means diversifying your portfolio by buying broad market index funds. It actually means that you make a portfolio decision based on all the personal circumstances and not on hearsay through a headline or research of others.
A few examples of an Active Investor:
- If a person invests in low cost ETF’s and trades them regularly depending on his perception for the market movements then he is termed as an active investor. It is quite possible that he never invests in other individual stocks or bonds.
- Another example could be wherein a person has purchased a Mutual Fund and does nothing after that. In this case the mutual funds are being traded by the fund managers which bring in regular fluctuation to his returns then he would be termed as an Active Investor.
A few examples of a Passive Investor
- When you a person is involved in buying diversified funds or the ETF’s holding it over a period and never trading them, he would be termed as a Passive Trader. They basically look forward to long term gains with the increase in the stock’s price.
Should one be an active or a passive investor?
The question is very simple, it means whether you wish to be actively involved in your investments or invest and look for a long term return through them. Answer to this could be even simpler where you should be an active investor if you wish to make regular gains, however the risk here is much higher. On the other hand if you just like to keep investing and eat the fruits later then passive investing is something you need to be adopting. Overall the question lands up on you to choose the best one for yourself. If you have the courage to take risks and more importantly time to evaluate your stocks and strategies on a regular basis then Active Investing is something you should be trying out.
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Abhishek Gupta
Abhishek Gupta is working as a Fund Administrator (Hedge Funds) with the HSBC Bank (Kolkata) for over a year. He pursued Bachelors in Commerce from Calcutta University and completed postgraduate as MBA (Finance) from Calcutta Business School.
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