active investing
An investment approach that involves frequent buying and selling of securities with the goal of outperforming a benchmark index through security selection or market timing.
Example
“Active investing typically involves higher fees and taxes, and most active funds underperform their benchmark over 10+ years.”
Memory Tip
ACTIVE investing = trying to beat the market through skill. Most fail to after fees.
Why It Matters
Active investing matters because it directly affects how much you pay in fees and taxes, and whether your investment returns beat the market or fall short. Understanding this approach helps you decide if frequent trading aligns with your financial goals and risk tolerance.
Common Misconception
Many people believe that active investing always leads to higher returns than passive investing, but studies show that most active investors underperform the market after accounting for fees and taxes. The majority of professional fund managers fail to consistently beat their benchmark indices over long periods.
In Practice
An active investor might buy 100 shares of a technology stock at $50 per share, then sell them three months later at $65 per share for a $1,500 gain. However, they would pay trading commissions, capital gains taxes, and potentially incur losses on other trades, ultimately earning less than someone who simply bought and held an index fund for the same period.
Etymology
ACTIVE (engaged, doing something) INVESTING. Actively making decisions to beat the market.
Common Misspellings
Start investing with no commission trades
Related Terms
More in investing
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See Also
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