Trading is a popular investment strategy that allows you to buy and sell stocks based on your expectations of their price movements. Trading can be an effective way to generate returns, but it also has its own risks and costs. If you’re considering trading stocks or other securities, it’s important to understand the goal of active trading so that you don’t make costly mistakes with your investments.
To take advantage of small moves in the market
In order to succeed in active investing, you need to have a long-term investment horizon and be willing to accept short-term losses. You also need to understand that market volatility can lead to periods of losses on your portfolio; therefore, it is important that you diversify your investments across various categories so that if one category performs poorly, your other holdings will be able to offset those losses.
To profit from short-term price changes
Active traders are looking to profit from short-term price changes. Short-term means anything that happens within a few days or weeks, whereas long-term refers to years or even decades. Active traders seek out market inefficiencies: temporary mispricings that can be exploited with just a little research and patience. The goal is not to make quick money but rather to “buy low and sell high” over time while minimizing risk exposure during periods of market volatility.
To profit from short-term market inefficiencies
Active trading can be defined as the process of buying and selling securities over a short period of time. Active traders are typically focused on making quick profits from the mispricing of securities, which irrational market participants often cause.
For example, if you believe that a stock is mispriced because it has moved too far from its intrinsic value (fair value), then you may want to purchase it today at an artificially low price and sell it once the price rises closer to its fair value. This type of strategy relies on identifying short-term inefficiencies in order for you to profit.
To invest for the long term and minimize transaction costs
Transaction costs are the costs of trading stocks, and they include commissions and bid-ask spreads. The more frequently you trade, the higher your transaction costs will be.
This is because small investors have to pay higher commission fees than large investors do; this means that frequent traders who invest in companies with low share prices will pay more per trade than frequent traders who invest in companies with high share prices. In addition, when you make a market order (an order to buy or sell at the best available price), you can’t specify how much money should be spent on purchasing stock or selling it off—you just get what’s available at that time on the open market.
According to SoFi experts, “Make your first trade or your next trade with active investing. Learn the market as you do-it-yourself.”
Hopefully you now have a better understanding of the goals of active trading. If your goal is to invest for the long term, then you can do passive index investing. For short-term traders, however, active trading can be a great way to boost returns and minimize transaction costs.
