What is the difference between passive and active investment?

There are many different strategies you can take concerning investment, but the two most basic are passive and active. While these are very different strategies, trade execution and low latency execution services are still very important. Just because you are taking a more passive approach to investment doesn’t mean that the latest in cutting-edge technology and trade execution dealing services are not important.
 

What is passive investment?

Passive investment can be execution-only or advisory and tends to incorporate an array of collective investment vehicles such as:-
 

• Exchange Traded Fund (ETFs)
• Mutual funds
• Investment trusts
• Discretionary fund management
• Other collective investments

As the term suggests, passive investment is seen as a relatively long-term strategy where there will be minimal change. However, while investors may not be too busy on the trade execution front, those managing the collective investment funds will be active behind the scenes. 

It is also possible to put together a passive investment strategy by investing in individual shares or a group of shares.

 

What are the pros and cons of passive investment?

The idea behind passive investment is simple, by investing in collective investments, you are effectively handing over management of your funds (or slice of the fund) to third a party. However, this is not your stereotypical style of low-touch execution because while you decide on the investment vehicle, your funds are managed by others.

Some of the main benefits of passive investment include:-
 

• Avoidance of short-term volatility
• Reduced dealing costs
• Managed by an independent third party
• Option to switch out of underperforming collective investments

If you hand your funds over to a discretionary manager, they will make investment decisions on your behalf. Switching discretionary managers is a little more complicated than changing from one collective investment to another.

Some of the main drawbacks of passive investment include:-
 

• Managed collective funds tend to be more conservative (risk-averse), although this is not always the case
• You are banking on the skills of an investment management team

In general, a passive investment strategy tends to be more popular with those that take a long-term approach and/or are happy for third parties to act on their behalf.

 

What is active investment?

Active investment tends to incorporate low latency execution only services that could see investors buying and selling daily or on a relatively short-term basis. This type of strategy can take in a range of different investment instruments such as:-
 

• Stocks
• Bonds
• Derivatives
• Commodities

Even though this type of investment strategy tends to be low-touch execution-only, active investors may also trade ETFs and other mutual funds. If an active trader can see a turn, they may well consider it!

 

What are the pros and cons of active investment?

Those who utilise an active investment management style will significantly increase trade execution numbers. Whether as a day trader or a relatively short-term trader, active investment tends to revolve around execution-only services. 

Some of the benefits of active investment include:-
 

• Due to the low touch execution style, an investor can make decisions on their own, relatively quickly
• Execution only services are cheaper than managed trade execution services
• There are no barriers/restrictions to the type of investments you can trade
• Modern-day low latency execution services cater for high-speed, high-volume trading

The bottom line is that an active investor will take responsibility for their own decisions and the success and failure of their investments.

Some of the drawbacks of active investment include:-
 

• A short-term investment timescale could see you lose out on long-term returns
• Short-term trends can change relatively quickly, switching a profit to a loss in the blink of an eye
• Misreading technical graphs and other financial indicators can prove costly
• As a consequence of dealing frequently, dealing costs can be relatively high

These are the main drawbacks of active investment, which need to be considered in tandem with the benefits.

 

Conclusion

An active investment style revolves around low latency execution-only trading services. A passive investment approach is effectively a buy and hold strategy which may suit those not looking to take undue risk. Most of our clients are professional investors and companies looking to undertake execution-only services at competitive rates. However, we also accommodate those looking for a more passive approach with our personalised prime broking services.

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