If you're new to the world of investing, chances are you've come across some unfamiliar terms, and potentially had a hard time figuring out exactly what they mean and why they're so important. Fortunately, learning the ins and outs of investing is easier than ever before, and many online platforms like Yieldstreet have been designed to provide beginners not only with novel investment opportunities, but also the educational tools necessary to really hit the ground running.
One important distinction to make is the difference between active and passive investing. Before highlighting what those differences are, it should first be stated that one is not necessarily better than the other, but rather each has its own applications and potential. With that consideration in mind, here is a brief overview of active investing, passive investing, and the respective benefits and limitations.
Generally speaking, active investing involves, well, action—and typically lots of it. An active investment strategy is usually characterized by frequent buying and selling, with the overall goal of maximizing returns by capitalizing on real-time fluctuations in the market.
One common example of active investing is day-trading, which consists of an individual attempting to buy stocks at their lowest point and quickly sell them back at a higher point for a fast return. Another example is hedging, which refers to the popular strategy and business model of hedge funds, and usually consists of betting aggressively on the performance of certain stocks, companies, or entire markets, and actively altering those bets to produce large gains and avoid tough losses.
Active investing has its benefits in being a flexible approach with the potential to yield exceptionally high returns but is also limited by its much higher risk profile and reliance on high volumes of capital to produce worthwhile results.
Passive investing is generally a longer term approach than active investing. Rather than constantly buying and selling stocks for immediate gains, passive investors tend to buy and hold, opting to accumulate relatively smaller gains over longer periods of time.
One popular passive approach is to invest in an index or mutual fund that contains a specific set of multiple assets, earning investors smaller returns over time as each asset gains value. Another example is investing in real estate or real estate investment trusts (REITs), which allows investors to own property without needing to oversee its management, and reliably generate passive income as long as the investment is held.
Passive investing has its benefits in being relatively lower risk in comparison to active investing, lower fees, and less complicated tax obligations related to capital gains. For some, however, passive investments don't allow for as much freedom as their active counterparts, and the generally smaller individual yields aren't as enticing as the large returns that can result from a more aggressive strategy.
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Original Source: What is the Difference Between Active and Passive Investing?