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Answer:
Dear Mr. Moore,
The
term "active trader" is a vague one in that there
is no official definition of how many trades it takes
in a given time period to be called active. However,
as is probably obvious, an active trader is one who
thinks he can accurately identify stocks that will
yield a short-term profit. An active trader monitors
his portfolio daily; many, in fact watch their positions
several times each day.
An
active trader only buys companies he thinks will move
up in price within a short time frame. He will buy
these stocks, hold them until he feels the profit
has been realized and then sell his position, and
immediately go searching for the next short-term profit
- or what he hopes will be a short-term profit. The
active investor is more of a trader -- a trader who
does not think long term.
The
hallmark of an active trader is the type of analysis
he uses. He relies on technical analysis, including
stock charts and ratios as well as mathematical measures.
These tell him whether to buy or sell.
How
long does an active trader hold his positions? It
varies. It could be for a few days, perhaps a few
weeks or on occasion even several months. But an active
trader is not interested in maintaining a position
for say a year or more. His entire investment philosophy
is based on the concept (which may or may not be accurate)
that he can beat the various stock market indexes
by picking wisely, taking quick profits and moving
on.
The
most extreme example of an active trader is the "day
trader." This is someone who spends most of the day,
or even all day, sitting in front of a computer or
several monitors, and trading stocks non stop, usually
for small profits. Day traders are known to do 25
to 75 -- or even more -- trades each day. In the extreme,
their investment horizon may be as brief as an hour
or even less.
This
strategy is obviously the direct opposite of the buy
and hold approach. The buy and hold investor looks
for companies that have solid products or services,
that are well managed, and that will be good investments,
not just tomorrow or next week, but several years
from now. In the case of a blue chip stock, a buy
and hold investor may keep that position for many,
many years.
Whereas
an active investor uses technical analysis, the buy
and hold investor tends to rely on fundamental analysis
of a company, looking at the quality of its products,
its position within its industry, its long-term growth
strategy, the strength of management and the success
of its marketing plan.
Short-term
market fluctuations, the various business cycles,
or even inflation are unlikely to influence the buy
and holder investor. Instead, the buy and hold investor
selects companies that are likely to have continually
rising profits and thus the price of these stocks
and dividends will grow year after year.
Keep
in mind that the buy and hold approach is a less expensive
one. First of all, the IRS taxes long-term capital
gains at a lower rate than short-term gains. Second,
with this approach you wind up paying less in brokerage
commissions or advisory fees.
Good
luck!
The
securities markets are subject to the risks of fluctuating
prices and the uncertainty of rates of return and
yields inherent in investing and past performance
is no guarantee of future results. Periodic Investment
Plans, Dollar-cost averaging and Compounding do not
assure a profit and do not protect against losses
in declining markets and you should consider your
financial ability to continue to purchase through
periods of low price levels.
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