Definition of Passive Investing
Passive investing is one of the investment strategies which are used by investors to invest their money. Some believe that long term investment is more beneficial than short term investment whereas some people say that investment should be for the short term. In passive investing strategies, the investment is for a longer period of time. The investor believes that buy and hold should be the ideal approach to achieve the best results.
It is considered as one of the best strategies if the investors are planning for long term investment. In the passive investing approach the investors usually buy the stocks and hold them until they get their desired prices or sometimes they wait for some time. It can be cost friendly as well since the trading is not done regularly therefore the trading related cost is not associated with this strategy. Passive investment is very convenient for long term investors. The market may give positive returns for this type of passive investing. It is also very successful if the investors will get an idea of the maintenance of the stocks.
How does It Work?
Passive investing is for long term investors who are willing to put their money in the market for a longer period of time. The passive investing is a way to achieve the goals of long term investors. The investors purchase a stock and keep the same with themselves for a longer period of time this is how the passive investing strategy works.
Example of Passive Investing
- Investment Made in Real Estate: The investment made in real estate is a classic example of passive investing strategies. The investment is made which is generally of a bigger amount and then if the property is taken for investment purposes it is sold out at a much higher rate or as per the inflation or other facts included. The investors buy and hold the property for a much longer time and then think of selling the same.
- Stocks with High Dividends Yield: The investors who want to invest their money for a longer period in stock can also check for dividend yielding stocks. Their goals should be of earning more dividends.
- Investing in Gold and Ornaments: Investing in gold and ornaments is one of the old and traditional ways of having a reserve and an example of passive investing. The investors purchase the gold biscuits and ornaments to invest their money and then they sell them after many years when the price of the gold and ornament rises.
Passive Investing Strategies
In this strategies, the investment is made in the present and the property or thing is hold on or a longer period of time. This will allow inflation to get into. The passive investment strategies works wonders for investors who are willing to invest for a longer period of time. This strategy is not for the investors who invest for a short period of time and then invests somewhere else. The passive investment strategies are for those who are willing to wait for the returns. The passive investing strategy should be followed by the investors having a future vision of price or price fall.
Importance of Passive Investing
- The passive investing is having great importance for the investors who are willing to invest in the stock for a longer period of time.
- It reduces the cost of trading in the stock market.
- The passive investing strategies also saves taxes because when less transactions are done then the implication of cost is also less and therefore the taxes are also less compared to the other active investing strategies.
- The passive investment strategy also maximizes return by reducing the overall cost of the trading.
Some of the advantages are given below:
- It is very effective for investors who are planning to invest for the long term.
- Passive investing strategies are very cost effective because it includes less trading and the therefore less incidental cost is incurred.
- In case the investors opt for passive investing they get a very clear picture of their investment because in passive investment the transparency is there.
- The passive investment strategies reduce the taxes associated with the trading cost of the stocks.
- A passive investment strategy is considered as a safer investment strategies than an active investing strategy.
- In Passive investment strategies, the investors are not required to actively manage the portfolio of their investment therefore the investment decision can be postponed.
- In a passive investment strategy, the investors are not exposed to risk and thus they will have a safer investment.
- It is also very simple in nature very less complications are there. The passive investment decisions are also very simple to make because buying and selling decisions are made for a very less number of times.
Some of the disadvantages are given below:
- In passive investing the buying and selling is done for a very few time. Therefore the investors may lose scope of the latest trends in the market.
- In passive investing the money is invested for a longer period of time. If the investors could have used this money then he would have earned much more money out of it.
- The returns can be a bit late for this type of investment strategies. Investing such a big amount and then reinvesting it to make profits makes it a bit difficult task.
There are both pros and cons of passive investment. Investors who are willing to invest for a longer period of time can invest in this strategy. This is a traditional strategy which is generally for the big investment. The passive investment strategy is also very cheap compared to the active investing strategy. This strategy can be a bit challenging for the investors who are seeking the latest market updates because in this strategy if the investment is made then it should be for a longer period of time.
This is a guide to Passive Investing. Here we also discuss the definition and how does passive investing work? along with advantages and disadvantages. You may also have a look at the following articles to learn more –