Active Trading vs Passive Investing: Know The Difference



February 4, 2019

Trading and investing are for gaining profit from the stock market, but both follow different paths. Traders keep moving in and out of the stocks within days, weeks, minutes for short term profits. They focus more on a stock’s technical factors than long term prospects of the company. Investing involves long term goals. It considers terms from months to years to decades, and hold stocks throughout the rise and fall of the market.

Let us understand the two – active trading vs passive investing:

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What is day trading, also known as active trading?

Active trading is a move to buy and sell the securities. It helps grow your portfolio and focus on gaining profit from the price movements on a short term stock chart. This process needs attention and availability of several information sources to boost the chances. An active trader keeps an eye on the stock market, recognising trends and looking after the new avenue to make a trade.

Most of the people think of day trading when they think of active trading as it involves buying and selling of stock all through a day to benefit from minor changes in the market. Participants are anywhere from amateurs to professionals who are well aware of the market and know what times are best for buying and what time is best for selling – on a given stock and at a given time. Given all those factors, obviously, day trading involves vast amounts of stress.

What is investing?

Investing is an act of providing capital or money for a project to gain a higher return as profit or income.

By definition, investing provides a certain yield over a more extended period.

Keeping aside some amount of money and investing it for the future needs is believed by many to be a way to make most out of what we earn. Investment implies prioritizing your financial future over present desires.

There are a lot of methods for investing such as adding money into stocks, mutual funds, bonds, real estate, ETFs, and so on.


The Underlying Importance of Assets

The underlying asset is utilised in derivatives trading. A derivative is a financial instrument with a fixed price rooted in a different asset. In other words, underlying assets provide value to the derivatives.

Let’s say, an option on stock XYZ provides the holder right to buy or sell XYZ at the strike price. The underlying asset for the option is stock of XYZ.

Investors can use options and the idea of underlying assets for two reasons – to profit, or to limit the risk. When you buy options to think about the future stock price movements, you stop the downside risk at a certain point. Still, the possibility of earnings is unlimited.


What does a day trader’s day looks like (as opposed to an investor’s)

Traders take part in financial markets to buy and sell stocks, forex, futures and other types of securities by closing the positions with the aim of making substantial and frequent profits. There are many types of traders varying from small to pro working from home office to institutions.

Most of the day traders catch up the events that took place overnight and can have an effect on the day’s trading session before the trading starts. After this, the traders turn on their computers and open their analysis and trading platforms. They analyze the potential trading opportunities. The first hour is usually volatile, especially after gapping, and scalping opportunities also come up mostly early during the day. Other traders, such Scott Malatesta, prefer other types of trades. They look for reversal opportunities, among others.

On the other hand, an investor should not deal with his or her investment on most days. It is better practice for most investors to only look at their books every so often, and to discuss them on given time intervals. Some do so monthly or quarterly, while other do so yearly.

What Is the Expected Return

Expected return is the profit or loss expected by an investor on an investment known for an expected rate of return.

Investors return

Investors would look at the growth or reduction of their portfolio over a period of a year, and compare it to benchmarks such as the S&P500, FTSE, Real Estate Indices, and so on.

A trader thinks differently. He is looking at the profit and loss he makes daily, and does not think of percentages but thinks of monetary upside or downside.

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