Active investing and passive investing are defined primarily by their investment strategies and approaches to managing portfolios. Active investing involves making ongoing buying and selling decisions based on market research, economic trends, and individual stock performance. Investors engage in regular trades in an attempt to outperform the market. This strategy requires extensive analysis and often a keen awareness of market situations to capitalize on investment opportunities.
In contrast, passive investing is characterized by a long-term strategy focused on buying and holding a diversified portfolio, typically through index funds or exchange-traded funds (ETFs) that replicate the performance of a market index. This approach is based on the belief that over time, the market will provide a satisfactory return, and therefore, frequent trading is unnecessary.
The correct answer highlights the essential difference in the management style between the two approaches—active investing is dynamic and involves frequent transactions, while passive investing is stable and relies more on market trends over time rather than constant trading. This fundamental distinction encompasses the strategies employed by investors in both methodologies.