What is Active Investing?

Ken Black
Ken Black
Man climbing a rope
Man climbing a rope

Active investing is a strategy of buying and selling products in rapid succession in order to take advantage of temporary market conditions. Though the process can be highly profitable, it can also be highly risky. While many investors take a long-term approach to buying, this is not the case with active investing.

A number of different products can be used with active investing. While stocks come to mind as one of the most common, it can also be done with bonds, commodities, foreign currency, and real estate. Some of those, such as trading stocks and commodities, can be done relatively quickly and easily. Trading real estate can take a considerably longer time, simply because the process involved is more labor intensive and time consuming. Real estate can still be considered an active investment, however, simply because the length of time it stays with one owner is considerably shorter than the average.

There is no firm rule as to when something becomes an active investment. Generally speaking, holding onto a security or investment for days or weeks, rather than months or years, can make it an active investment, but the definition is relative. Oftentimes, active investing will require making several trades a day, especially in the commodities or foreign exchange markets. These are highly fluid, and change very quickly, depending on conditions.

Many active investors may also engage in passive, or long-term investment. For some, the money used in active investing is money they have already determined they could lose. In this sense, it is much like the spending money a gambler may take to the casino. The difference is, of course, active investing does not depend on luck, but rather on being able to interpret various market conditions. The money in an IRA or 401(k) is money the active investor is expected to use for retirement.

There are times when active investing may involve a little luck. Most of the time, luck is a secondary consideration to keeping a keen eye on the markets. Over the years, certain announcements or trends may be easier to predict. For example, an announcement of a merger of two companies may cause the stock of one to rise or the other to fall. An experienced investor will know which one is the wiser investment. Thus, the investor who knows when these things tend to happen may be able to jump on opportunities.

In addition to knowing when to buy, the active investing requires the ability to know when to get out as well. Most active investors will watch their products very carefully, and have a certain threshold in mind. Once that is reached, a sale will be triggered. The investor will likely have a profit threshold and a loss threshold, the latter being when to finally sell if the investment begins to lose money.

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