The stock market is everywhere you turn. Each time you turn on the news or open up a newspaper, you’ll see stock market figures or information on whether the market closed higher or if there were weekly losses. Even if you are not a financial advisor or investor, having knowledge about the stock market will help you understand the bigger picture of what these numbers actually mean to the economy and the world.
For those working in the financial sphere, the stock market functions as the medium where transactions take place, both buying and selling. Investors typically choose between active or passive investing, each having their own set of strategies, advantages, and goals.
In most cases, passive investors believe in putting their funds towards mutual funds or index funds, which will have the potential of earning a positive return on over a set amount of time on a longer period, typically several years.
Passive investing can be quite appealing to those who do not want to take high risks with their investments. Active investors have to rely on their knowledge and the insight of financial advisors when it comes to buying and selling stocks, but this information is not foolproof.
This type of investing limits the passive investor in being able to make transactions on individual stocks, thus the passive investor is able to take advantage of low risks and relatively low fees.
It’s easier to follow an index fund, as opposed to individual stocks, and it’s less expensive on a whole than active investing, so it’s a good opportunity for beginners.
Passive investing doesn’t lead to spikes in capital gains, making filing taxes much simpler and allowing the investor to avoid the capital gains tax at the end of the year as well as other merits which involve low risks involved in this type of investing type.
Investing in an index and not trading individual stocks normally does not lead to high capital gains. Over time, the investment will gain capital, but not like the short spikes in capital gain that an active investor may see.
Passive investors which follow index funds, which can be limiting sometimes, as they are restricted to the holdings within the index fund.
Rather than putting their assets into index funds, active investors take a bigger risk by investing in individual stocks so that they can sell them at an opportune time and make profits from an individual transaction. In other words ‘Risk for Reward’ and in a much timeframe.
Not staying within the confines of an index fund allows active investors to have more control and freedom in their portfolio. These investors can focus their time on research and be discovering upcoming stocks.
Active investors have the opportunity to strategize and hedge their bets in order to ensure profits. When individual stocks begin to fail, these investors can easily sell or replace them from their portfolio.
Being an active investor gives you the opportunity to make profits over a relatively short period of time, depending on when you are able to buy and sell individual stocks.
Active investing can be difficult and time-consuming as they need reliable research to stay current on the constantly changing landscape of the stock market in order to make a decision on what stocks to keep and what to sell.
In general placing funds into individual stocks is far riskier than investing in a mutual fund or having an index fund because it all depends on buying and selling of stocks at the right time. “Knowing when to get in and knowing when to get out”.