What is active investing?
An active investment strategy is used by investors who strive for high returns . This is put into practice by actively monitoring price charts and entering at the right time. Many active investors strive to beat the market. But how do you use an active investment strategy and what are the advantages and disadvantages associated with it? You can read it below.
Active investing: how does it work?
When you are actively investing, you naturally adopt an active attitude towards the stock market . At the same time, you also manage your investment portfolio very actively. This leads to a portfolio that continuously changes composition. An active investment strategy automatically entails that you have to keep a very close eye on the market. You look for specific entry points that could be favourable to try to grab some profit in the short term.
In addition to trying to make a profit, there is also the aim of beating the market or an index . Many transactions are carried out for this purpose. Day trading is a variant of active investing. In general, day trading is when someone actively takes continuous positions on a daily basis. The potential profit that is achieved per position is often not very high, but a sum often still provides a nice amount. However, not every active investor is a day trader.
Active investing does not necessarily mean that you open a lot of positions. Having an active attitude is enough in itself. For example, if you keep a close eye on the stock market, but do not open many positions, then this can still be called active investing. Timing is an essential element that distinguishes active investing from passive investing . With passive investing, it is less about the moment of entry and more about how long you have had a position. A passive investor tries to ride the wave of growth in the market.
The right entry
Above we have already briefly discussed that a correct entry is essential within an active investment strategy. What exactly is the correct entry, is not always easy to determine in practice. Fortunately, there is a method of analysis that can give an approximate picture of the right moments to possibly enter. This is called technical analysis.
In technical analysis, you analyze the price chart of a specific investment product. You use various technical indicators and trend lines. Relevant insights can be obtained from virtually every price chart. For example, you can determine when a chart might stop rising or falling. You decide for yourself for which period you perform a technical analysis. Active investors often look at developments that occur within a relatively short period of time. For example, charts that accurately show the price movements of the past few minutes are often included.
Risks of active investing
An active investment strategy is sometimes seen as a strategy for traders who want to make a lot of profit in a short time. Of course this is possible, but in practice it often goes wrong. Not every active investor is profitable. This is largely due to the fact that investment products are often used that involve a lot of risks. This mainly concerns derivative investment products with leverage, such as a CFD . If you want to invest actively, it is wise to first delve into this thoroughly.
The pros and cons
Over the years, many opinions have been formed about active investing. Below you will find a list of some significant advantages and disadvantages.
Advantages
- Potentially high returns. If you get the hang of it, you can make quite a bit of profit.
- Anticipate the market. When you use an active strategy, you will always be able to anticipate the current market conditions.
- Involved. When you actively invest, you will have to be very involved in the market. You may find this interesting and it can also broaden your knowledge.
Disadvantages
- Relatively high costs. Because you as an active investor probably open and close many positions, you will have to pay transaction costs again and again. In addition, analyzing charts is also not always free.
- Moderate consistency. In the long term, the active investor is not always more profitable than the passive investor. Active investing comes with ups and downs. Sometimes you make a lot of profit and sometimes you slip considerably.
- Less suitable for novice investors. When you are just starting to invest, adopting an active investment style can be very challenging. The bar for profitable active trading is high.
Start investing
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