Investing in the stock market: trading or passive investing?

For many savers investing in the stock market is considered something complicated, which requires specialized knowledge to earn money, and therefore reserved for professionals or a few enthusiasts ready to dedicate the necessary time to it.

This view of the stockbroker, which we imagine with our eyes fixed on stock prices, corresponds to a particular style of investment: trading. In fact, this method of investing is very different from that of most equity investors.

We will see why trading is an investment method that is not very suitable for individual savers and what strategy to adopt to optimize the performance and management times of their investments on the stock exchange.

Trading: time-consuming and risky

Trading is an investment style consisting of buying and selling shares (or derivatives) with a short or very short term investment horizon (from a few minutes to a few days).

This investment mode is a stand-alone activity because trading takes a long time. For good reason, the investor must constantly follow the evolution of the financial markets, stay informed on the latest economic news and adjust the positions of their portfolio in real time. Trading also requires a good knowledge of macro and micro economics.

This investment method is difficult for individual investors to predict. This is why only enthusiasts are ready to dedicate many hours to it. You have to choose the right stocks and buy and sell at the right time, which is very risky and stressful.

Ordinary savers who wish to take advantage of a good stock market trend can implement a much simpler and no less effective strategy for investing in the stock market: passive investing.

passive investments in the stock market

The principle of passive investing is based on holding the shares for a long time, limiting the number of interventions required by the investor to manage their portfolio, while favoring the investment in trackers (index funds, come back later).

Long-term investing allows the saver to take advantage of tax-efficient savings schemes such as the equity savings plan (PEA) and life insurance. In fact, on a PEA over 5 years or on a life insurance over 8 years, the saver can make withdrawals benefiting from a reduced taxation on capital gains. On capital gains, only social security contributions are collected (tax reduced to 17.2%). These are capitalizing envelopes, that is, a sale with a capital gain does not trigger taxation (withdrawals only). Therefore, within the PEA and life insurance, the investor can increase his savings, arbitrage between his investments and reinvest his earnings without tax friction. The capital works at full capacity.

Conversely, short-term investment (trading), by multiplying the operations within an ordinary securities account (CTO), does not allow for any tax advantage. Dividends and capital gains are taxed at 30% (the flat tax) or at the income tax scale.

But for a passive investor, the challenge is to spend as little time as possible managing their investment. Ideally, he doesn’t want to have to ask himself about the choice of stocks to include in his portfolio. However, building a diversified equity portfolio takes time and involves placing multiple orders on the stock market. There is an alternative to direct equity investing: investing in equity funds.

Investing in equity funds.

The question then arises as to which funds to turn to. Passive investors are turning massively to index funds such as trackers and ETFs that track the performance of the Nasdaq or CAC 40. They favor funds with strong geographic and sector diversification. We can mention in particular the MSCI World among the reference indices for investing in the equity market. Amundi and the American giant BlackRock (with its iShares range) are two management companies that offer a wide choice of ETFs. Index funds have very low annual management fees (generally around 0.20% or 10 times lower than active funds), which optimize performance net of investment fees.

Once the saver has chosen his fiscal endowment (PEA or life insurance) and his means of investment (index fund as suggested above or otherwise), a final question arises: when is the right time to invest? To properly capture long-term stock market performance, a popular strategy directly across the Atlantic is the average cost dollar (DCA). It consists of investing a fixed amount at regular intervals, without trying to anticipate the short-term evolution of the stock markets. Better organized passive investors set up an automatic payment schedule, for example by allocating € 300 each month within a life insurance contract.

To notice

For readers of Echos START, our partner Avenue des Investeurs, a financial information and education portal created in 2018 by two passionate investors, shares his knowledge of personal finance.

Note bis

This forum was written by an external contributor to the editorial staff. Les Echos START does not pay him, nor has he paid to publish this text. The choice to publish it was therefore made solely on editorial criteria.

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