Active Trading vs Portfolio Management
Updated by Justin Ling
Active Trading vs Portfolio Management
On EquitySim we distinguish between two types of strategies: Active Trading vs Portfolio Management.
Portfolio Management: refers to holding a collection of investments and focusing on the interaction between those investments as the primary way to determine trades.
You can think of a portfolio like a recipe, where each investment is an ingredient. Just like you'd determine how much salt to put on your meal, you'll choose how much exposure/weight you want each investment to hold in your portfolio.
The best way to start is by trying to maximize your Diversification score. This can be found in your performance tab.
Note: We recommend learning to build a portfolio as the first step for beginners.
Active Trading: refers to buying and selling securities in the short term to generate profits. Think about it like selling buying and selling items on eBay or Facebook marketplace. You'll make money if you can buy things for cheaper than you sell them. Your knowledge of what is a "good" price to buy, and knowing when to sell is what helps you beat out the competition.
To get started with Active trading, start training your market sense. Choose a few companies, and start following the trends of the company closely (minute-by-minute, hour-by-hour, day-by-day). Place as many buy/sell orders with this company as you can. See if you can generate a profit.
Other Types of Strategies
Arbitrage is the simultaneous purchase and sale of an asset to profit from an imbalance in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies and would therefore not exist if all markets were perfectly efficient.
A global macro strategy is a hedge fund or mutual fund strategy that bases its holdings — such as long and short positions in various equity, fixed income, currency, commodities and futures markets — primarily on the overall economic and political views of various countries or their macroeconomic principles.
Long/short equity is an investing strategy that takes long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline. A long/short equity strategy seeks to minimize market exposure, while profiting from stock gains in the long positions, along with price declines in the short positions. Although this may not always be the case, the strategy should be profitable on a net basis.
Passive investing is an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading. Passive investing is not aimed at making quick gains or at getting rich with one great bet, but rather on building slow, steady wealth over time.
Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and deemphasizes the significance of economic cycles and market cycles. In bottom-up investing, the investor focuses his attention on a specific company, rather than on the industry in which that company operates or on the economy as a whole. This approach assumes individual companies can do well even in an industry that is not performing.
Top-down investing is an investment approach that involves looking at the overall picture of the economy and then breaking down the various components into finer details. After looking at the big-picture conditions around the world, analysts examine different industrial sectors to select those that are forecast to outperform the market. From this point, they further analyze stocks of specific companies to choose potentially successful ones as investments.
Fundamental analysis is a method of evaluating a security in an attempt to assess its intrinsic value, by examining related economic, financial, and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security's value, including macroeconomic factors (e.g. economy and industry conditions) and microeconomic factors (e.g. financial conditions and company management). The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security's current price, thus indicating whether the security is undervalued or overvalued.
Technical analysis strategies are used to forecast future price moves by analyzing past and current market action. Unlike fundamental analysts – who evaluate a security’s intrinsic value – technical analysts use price charts and various analytical tools – including technical indicators and chart patterns – to evaluate a security’s strength or weakness and predict future price changes.