Stock Market Investing: Trading or Passive Investing?

For many savers, investing in the stock market is considered a challenging task that requires special skills to make money, and is therefore designed for professionals or a few enthusiasts who are willing to devote the necessary time.

This vision of the stockbroker, which we imagine, chained to stock market prices, corresponds to a special style of investing: trading. In fact, this method of investing is very different from the method of most investors.

We will look at why trading is an investment method that is not very suitable for individual savers, and what strategy should be adopted to optimize the efficiency and time of managing their investments in the stock market.

Trade: time consuming and risky

Trading is a style of investing that consists of buying and selling stocks (or derivatives) with a short-term or very short-term investment horizon (from a few minutes to a few days).

This way of investing is your own business, because trade takes a lot of time. No wonder the investor must constantly monitor the evolution of financial markets, keep abreast of the latest economic news and adapt the position of its portfolio in real time. Trade also requires a good knowledge of macroeconomics and microeconomics.

This way of investing is difficult to predict for individual investors. That’s why only enthusiasts are willing to devote many hours to it. You have to choose the right stocks, buy and sell at the right time, which is very risky and stressful.

Ordinary investors who want to take advantage of good stock market performance can implement a much simpler and no less effective stock market investment strategy: passive investing.

passive investment in the stock market

The principle of passive investing is based on long-term holding of shares, limiting the number of interventions required by the investor to manage his portfolio, while preferring to invest in trackers (index funds, return later).

Long-term investing allows the saver to take advantage of tax-efficient savings schemes, such as the Share Savings Plan (PEA) and life insurance. In fact, under a PEA contract for more than 5 years or life insurance for more than 8 years, the saver can withdraw funds, benefiting from reduced capital gains tax. Only social insurance contributions are levied on capital gains (taxation reduced to 17.2%). These are capitalization envelopes, ie sales with capital gains do not cause taxation (withdrawal only). Thus, under PEA and life insurance, an investor can increase their savings, resolve issues between their investments and reinvest their income without tax friction. The capital is working at full capacity.

On the contrary, short-term investments (trading), by multiplying transactions within the ordinary securities account (CTO), do not provide any tax benefits. Dividends and capital gains are taxed at a rate of 30% (fixed tax) or income tax scale.

But for a passive investor, the challenge is to spend as little time as possible on managing their investments. Ideally, he does not want to ask himself the question of choosing stocks for his portfolio. However, creating a diversified stock portfolio takes time and involves placing multiple orders in the stock market. There is an alternative to direct investment in equity: investing in equity funds.

Investing in equity funds.

Then the question arises as to which funds to turn to. Passive investors turn en masse to index funds, such as trackers and ETFs, which copy Nasdaq or CAC 40. They prefer funds with strong geographical and sectoral diversification. Among the benchmarks for investing in the stock market is MSCI World. Amundi and the American giant BlackRock (with its iShares range) are two management companies that offer a wide range of ETFs. Index funds have very low annual management fees (usually about 0.20% or 10 times less than active funds), which optimizes efficiency less investment fees.

After the saver has chosen his tax envelope (PEA or life insurance) and his investment vehicle (index fund, as suggested above or otherwise), he asks himself the last question: when is the right time to invest? To properly track the performance of the stock market in the long run, a popular strategy directly across the Atlantic is the DCA (average value in dollars). It is to invest a fixed amount at regular intervals, without trying to predict the short-term evolution of stock markets. The best organized passive investors create an automatic payment program, for example, allocate 300 euros per month under a life insurance contract.

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