Define passive investing and explain the difference from active investing

Expert Solution

Investors can adopt investment strategies to get return on their investment portfolio. The approaches can be active investing or passive investing.

Investment professionals mostly follow active investing and try to earn the best returns for their clients. This includes research on the companies, analysis of the financial performance, Analysis of the strategies adopted. Further, active investing consists of identifying better stocks and beat average returns of the market by frequent transactions. Short term price movements are monitored to take advantage.

In passive investing, investors invest for a long horizon. Limits are set on the amount to be invested and it becomes cost-effective to manage the portfolio. The passive strategy works on the perception of buy and hold, where frequent transactions are not made on the fluctuations in stock prices. A fund that is passively managed is called index funds.

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