Stock investing is the best way to build wealth, but you already knew that. You already knew that inflation robs your money of its value as it sits around not earning interest, and the only way to avoid that is to get that interest — to take your money and then use it to make more money. And you know that a typical buy-and-hold stock investment strategy can net you as much as 10 percent interest a year on average, which is far more than you’d get from a typical savings account. You know all of that, but you’re sick of buy-and-hold. Sure, 10 percent interest per year is nice, but you want more. You want to make the big money. You want to be an active investor.
Active investors take on more risk than their buy-and-hold counterparts, but their rewards can be proportionately greater. When you use smart strategies and make the right moves, you can build wealth quickly and make your money work harder for you than it ever has before. Here’s what you need to know about becoming an active investor.
What is an active investor?
Anyone who owns any kind of investment is an investor. But what is an active investor?
An active investor is someone who makes a lot of moves with their investments. You don’t have to do a lot of buying and selling to be a successful investor. You could just buy reliable companies and index funds, hold those investments for decades, and then cash out when it’s time to retire. But you could also buy stocks and sell them again the very next week, or use more complex strategies to actually bet against those stocks. You could be managing your money more actively, constantly buying and selling securities and other investments when you think the time is right. And that would make you an active investor.
There’s no exact definition of an active investor. Some investment brokerages have internal definitions based on the number of trades that are made per week (and there are definitions that matter to those brokerages for tax purposes), but, by and large, we can say that an active investor is simply one who monitors, buys, sells, and/or leverages their investments on an ongoing basis.
Active investors need to know their companies
When you invest passively, you pick big blue-chip companies and index funds. You rarely have to care much about how a company is actually doing in the short term, because you only care about the long-term fate of obvious winners.
When you’re an active investor, though, you need to know your stuff. You need to know how to read an earnings report and how companies determine valuations. You need to follow reputable financial news sources, including newspapers, TV channels, websites, and more. You need to understand stock market lingo and key concepts as they apply to companies individually and to the market as a whole.
Active investors need to know their trading techniques
It’s crucial for active investors to know the financial landscape. It’s also crucial for them to know what’s in their toolkit.
When you go beyond buy and hold, you go beyond buy and sell. You have to know options, spreads, and other more complex techniques. These trading techniques will expand the number of ways in which you can take a position on a stock or on the market in general: rather than just choosing to buy or not, you could bet against a stock, hedge your bets, and do other more complex things.
Active investors need to understand the big picture
An active investor had better know what he or she is invested in. And he or she had better know the different techniques that can be used to bet for or against stocks: simple buying and selling, options contracts, and more complex stuff like put and call spreads. And there’s one more thing that an active investor should know: how to combine those things into big-picture strategies.
You have a lot of ways to strategize as you invest. Some investors focus on big-picture patterns. Some traders look for harmonic patterns, such as the butterfly pattern, using advanced mathematics to predict market moves and turning points. Others focus more on individual companies and their value, trying to compare stock prices with earnings and valuations to determine whether a stock is overpriced or underpriced by the market.
Which strategy you’ll use will be up to you, of course, but having one will help guide your actions. With a good strategy, you can make sensible moves even when you make moves often!