What is ACTIVE?
Active investing is like being a detective! You're trying to find the best stocks or investments that will grow faster than everyone else's. It means you're actively picking and choosing what to invest in, hoping to beat the average.
What is PASSIVE INVESTING?
Passive investing is like going with the flow! Instead of trying to pick the best stocks, you invest in a little bit of everything. This usually means buying a special type of investment called an index fund, which holds a mix of many different companies. It aims to match the growth of the whole market.
Key Differences
- Effort: Active investing takes a lot of time and effort to research companies and follow the stock market. Passive investing is much simpler – you just buy and hold!
- Cost: Active investing can be more expensive because you might need to pay someone to help you pick stocks, or you might have to pay higher fees. Passive investing is usually cheaper.
- Risk: Active investing can be riskier because if you pick the wrong stocks, you could lose money. Passive investing is generally less risky because you're investing in a mix of many different companies.
- Potential: Active investing has the potential to make you a lot of money if you pick the right stocks. Passive investing is more likely to give you average returns, but it's also more reliable.
When to Use Each One
If you're really interested in the stock market and enjoy doing research, active investing might be something you want to try. For example, maybe you know a lot about video games and think a certain video game company will do really well. You could buy stock in that company and hope it goes up in value.
On the other hand, if you just want to grow your money without spending a lot of time on it, passive investing is a great option. Imagine you're saving for college. You could invest in a passive index fund that tracks the entire stock market and let it grow over time.
The Bottom Line
For most people, especially when they're just starting out, passive investing is the best choice. It's simpler, cheaper, and less risky. But if you're really passionate about investing and willing to put in the time and effort, you could explore active investing as well. Just remember to be careful and do your research!