What to Choose: Passive Trading versus Active Trading

The importance of growing your money via investment can’t be stressed enough. Saving money in the bank is conventional and outdated. Meanwhile, entrepreneurship a no-go option because you can’t stand overseeing a business.

Now there’s stock trading. You like the fact that it’s like playing at the casino – betting and taking risks, losing and winning. But of course you want to make sure you win most of the time. So what do you do?

Active Trading

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  1. Performance – have the potential of outperforming the market
  2. Goal – target a benchmark and beat it by exploiting the anomalies and irregularities in the market
  3. Method – constantly search out market information and gather insights to aid decision-making; use complex stock selection methods and trading systems
  4. Foundation – active managers believe that markets are inefficient and that they can exploit market irregularities to outperform their benchmark
  5. Advantage – with superior trading skills and informed investment decisions, investors can indeed outperform the market; managers can make offensive or defensive stance to keep gains at maximum
  6. Disadvantage – active is costly and time-consuming; managers keep only a limited range of securities that they believe can help achieve superior performance, but if such securities under-perform the losses are magnified

Passive Trading

  1. Performance – will never outperform the market
  2. Goal – replicate the performance of a target benchmark; do not try to beat market but match its performance
  3. Method – invest in the same securities and the same proportions as the target the benchmark like S&P 500 or Dow Jones Industrial Average; invest in broad sectors called asset indexes or asset classes;
  4. Foundation – passive managers believe that markets are efficient with prices fair and reflective of current data
  5. Advantage – closely matches the performance of its target index; requires little decision-making and tracking is easier and more efficient
  6. Disadvantage – investors can never outperform the tracked index; managers do not have power to influence the market and cannot take actions over individual securities because they are working with a portfolio

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Based on the summary above, you decide whether active trading is for you or not. If you are a risk-taker, active investment is the suitable choice, but if you are risk-averse, passive investment is definitely right for you.

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