What is 'Active Investing'

Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions.

BREAKING DOWN 'Active Investing'

Active investing is highly involved. Unlike passive investors, who invest in a stock when they believe in its potential for long-term appreciation, active investors typically look at the price movements of their stocks many times a day. Usually, active investors are seeking short-term profits. Smart beta exchange-traded funds are a cost-effective way for investors to take advantage of active investing by considering alternative factors as opposed to simply tracking a benchmark index, such as selecting a portfolio based on company earnings or some other fundamental approach.

Benefits of Active Investing

  • Risk management: Active investing allows money managers to adjust investors’ portfolios to align with prevailing market conditions. For example, during the height of the 2008 financial crisis, investment managers could have adjusted portfolio exposure to the financial sector to reduce their clients’ risk in the market.
  • Short-term opportunities: Investors can use active investing to take advantage of short-term trading opportunities. Traders can use swing trading strategies to trade market ranges or take advantage of momentum. Positions in swing trades are typically held between two and six days but may last as long as two weeks. Stock prices oscillate for the majority of the time which creates many short-term trading opportunities.
  • Outcomes: Active investing allows money managers to meet the specific needs of their clients, such as providing diversification, retirement income or a targeted investment return. For instance, a hedge fund manager might use an active long/short strategy in an attempt to deliver an absolute return that does not compare to a benchmark or other measure. (For more, see the Q&A: What’s the difference between absolute and relative return?)

Limitations of Active Investing

  • Cost: Active investing can be costly due to the potential for numerous transactions. If an investor is continually buying and selling stocks, commissions may significantly impact the overall investment return. Investors who invest with an active investment manager, such as a hedge fund, typically have to pay a management fee, regardless of how successfully the fund performs. Active management fees can range from 0.10% to over 2% of assets under management (AUM). Active money managers may also charge a performance fee between 10% and 20% of the profit they generate.
  • Minimum investment amounts: Active funds often set minimum investment thresholds for prospective investors. For example, a hedge fund might require new investors to make a starting investment of $250,000.

RELATED TERMS
  1. Active Trading

    Active trading is the buying and selling of securities with the ...
  2. Active Stocks

    Active stocks are heavily-traded stocks on an exchange, which ...
  3. Active Index Fund

    Active index funds track an index fund with an additional layer ...
  4. Passive Management

    Passive management refers to index- and exchange-traded funds ...
  5. Passive Activity

    Passive activity is activity that a taxpayer did not materially ...
  6. Active Risk

    Active risk is a type of risk that a fund or managed portfolio ...
Related Articles
  1. Investing

    How to Determine the Best Investment Strategy for You

    Before choosing passive or active investing for your portfolio, understand the differences.
  2. Investing

    Active Share Measures Active Management

    Active Share determines the extent of active management being employed by mutual fund managers.
  3. Investing

    Passively Managed Vs. Actively Managed Mutual Funds: Which is Better?

    Learn about the differences between actively and passively managed mutual funds, and for which types of investors each management style is best suited.
  4. Investing

    The 4 Key Elements of a Well-Managed Portfolio

    Be sure the manager of your actively managed portfolio isn't neglecting these four items.
  5. Investing

    Should Investors Nix Actively Managed Funds?

    Index fund returns are on a tear but does this mean investors should nix actively managed funds?
  6. Trading

    4 common active trading strategies

    Learn four of the most popular active trading strategies — and why active trading isn't limited to professional traders anymore.
  7. Retirement

    Active vs. Passive Investing During Retirement

    How these two investing approaches work – and how to decide which best suits your precious nest egg.
  8. Investing

    What Investment Is Best For You?

    ETFs, mutual funds, hedge funds and advisory firms are just some of the choices to consider.
  9. Investing

    Is Active Management Making a Comeback?

    The performance of actively-managed funds is starting to surpass their passive rivals. Here's why.
  10. Financial Advisor

    Passive vs. Active Management: Which is Best?

    Portfolio performance is as much about picking asset classes as picking stocks. Timing the market, however, is something else altogether.
RELATED FAQS
  1. Should I invest in ETFs or index funds?

    Learn the advantages to investing in exchange-traded funds, or ETFs, and index funds, and decide whether to include them ... Read Answer >>
  2. What Does Buy and Hold Mean?

    Buy and hold is an investing strategy focused on growing money in the long term while ignoring day-to-day fluctuations in ... Read Answer >>
Trading Center