Active Investing vs Passive Investing

Active investing involves identifying the specific security or set of securities that should be purchased or sold. It involves constant evaluation of every security in the investment portfolio so that investors can sell securities that are priced above their fair value. Similarly, while buying securities, investors look to identify securities that are priced below their fair value.

Thus, active investing strategies require more effort and involve a greater number of transactions compared to passive strategies. The objective of an active investor is to earn a rate of return that is above the return generated by the broader asset class.

Passive investing involves investing in a broad set of securities that fairly represent the asset class the investor needs to invest. Typically, passive investing strategy follows indexing strategy where an investor buys all securities that are part of an index. The objective of a passive investor is to earn the rate of return that the select asset class provides.

A passive investor does not decide upon individual securities to buy or sell but rather their analysis is limited to the broader asset class.

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